SPEECHLESS

Well, I never saw it coming.  I was always an admirer of Jean Claude Trichet but I never thought he could pull this on off in the manner which he did.  I was wrong.  M. Trichet solved the problem of Greek dinances by eliminating Greek finances.  The European Union and the taxpayers of Europe now own Greece.  They are also about to own everything else.

The deal is pretty much as described yesterday: a strech-out of early maturing debt either on a short term basis  or on a longer basis with a risk transfer to effectively the whole of Europe and with a give-back of 20% (which from the banks' standpoint may have been provisioned).  Interest rates would be artificially reduced which would no doubt result in market prices of less than par on the shorter term obligations but not resulting in a write-down because of the "hold to maturity" accounting treatment which has the effect of delaying any loss.  Not to be overlooked is the continuing treatment under Basel III (at least until 2018) of zero weighting for capital purposes due to the soverign nature of the debt.  Added to all this is a pledge of some 100 billion Euros from the EU and the IMF to get Greece rolling again.

It's all crap of course because the last thing Greece needs is more debt to add to it's present level of 140% of GDP even at 3.5% a years.  Greece if broke and this isn't going to fix anything.  It is a bail-out pure and simple first for the banks and second for the politicians who have once again shown that they will do anything with the monies of their taxpayers to save the Union and the currency.  Maybe that's not such a bad thing and I admit it is a judgement that only the Euros can make but it seems a bit odd to me that all of talk of "contagion" and "moral hazzard" that we have been hearing as of late is now out the window as this agreement is the greatest invitation to these two self-proclaimed horrors that I can imagine.  With the knowledge that you will be bailed out, with the guarantee of a positive carry, with no capital charge in place for at least 7 years (hint: that's never going to change) if I were  Euro Politician I would borrow like a crazy man and if I were a Euro banker I'd lend every Euro-penny I could shovel out the door.  But wait, it gets better.

The really important thing about this arrangement that has gotten a bit lost in the shuffle is the  treatment of the European Financial Stability Fund or the EFSF or, just to be honest, the bail-out fund.  This has been around for over a year now but yesterday's agreement has greatly expanded the use to which this fund may be put and increased it's "Assets" above the already pledged 440 billion Euros to a far greater number which--apologies--I have not been able to confirm.  This is a bail-out fund for anything that moves, governments, banks, the local butcher--the works.  It can aid governments, recapitalize financial institutions, be used to purchase soverign debt in the secondary market...whatever.  It is a LIQUIDITY facility that ol' Charlie has been telling you about for years, and of course with all the money in Euroland behind it, it can be very effective...with one big IF.

It is the biggest moral hazzard that has ever been created since the Creator dropped the snake in the Garden of Eden...or was it Eve...and don't you just know that certain among that gang of 18 know it.  It will remain a hazzard unless bad habits are not allowed to die slowly but killed quickly and that can occur only through greater political or monetary union or both.  It seems to me that the issue has been fairly joined and now the debate begins.  It's resolution?  Beats the hell out of me but it will be fun watching.  The Greek situation must survive the political process, and it may well decide the future of Euroland, but before I get too profound, here's something that's been knocking around inside my head:  when is a credit event not a credit event?   I called a guy by the name of Mad Max who does credit insurance.

"Madman, is this Greek thing a credit event?"

"Damn right it is."

"Max they're going to say it's not."

"They better not."

"Max, Trichet has won everything else, he's going to win this."

"Then he's got big troubles with me."

Max has been very long insurance on Greek debt.  Wonder what the other Maxs out there are thinking.



Harry Reid sent the Senate home for the weekend after he shot down the latest Repub proposal.  What a leader.

See you next week...it's still hot