http://marketsandbeyond.blogspot.com/

http://www.pcgwm.com/

1

Greece and poker time: last call After the (absence of serious) decision taken at the Eurogroup meeting in Brussels where disagreements between Germany and France appeared wide opened despite all the rhetoric contained in the press release, it is time for countries of the eurozone to show their hand, and it is weak. 10 year yield on Greek Government bonds surged above 7%, 1 year CDS above 650 bp (175 bp more than Wednesday or +35%) and 5 years CDS are in a vertical push above 450 bp – higher than Iceland for the first time -, around 50 bp more than the recent February peak and 150 bp above late March level (+50%). Meanwhile the spread between Greek bonds and German bunds is at its highest at 446 bp since the Euro made its debut in 1999.

In addition, according to the Greek central bank, local savers transferred about €10bn of deposits (+/- 4.5 per cent of the total in the banking system) out of Greece in the first two months of the year and George Papaconstantinou, Greek finance minister, said on Wednesday that the banks “have asked for access to the remaining funds of the support plan” or €28bn of government money put together during the 2008 global

http://marketsandbeyond.blogspot.com/

http://www.pcgwm.com/

2

credit crunch. My view is that in this environment, Greek banks have no longer access to the market even for short term financing. Finally, besides an upwards revision of the Greek budget deficit from 12.7% to 12.9% in 2009, Greece needs to raise in April and May EUR 11.6 billion, including a couple of billion 6 and 12 month Bills next week. According to Richard Clarida, global strategic adviser at Pacific Investment Management Co: “I don’t think that it would be an attractive enough yield [7%]. Greece is sort of like the Titanic. Eighteen things went wrong, and when they go wrong at once it’s problematic.” When the world largest bond investor has such a comment, you bet that markets will not put one cent on Greece at 7% or 8% or 9%. The story will end at best with a bailout from the IMF (with the possible help from eurozone countries) and at worst as a straight default: (1)With 11% of the Greek debt bearing floating rates, the 3% increase in the cost of financing represents an additional cost of EUR 1 billion / year (2) Assuming that the cost on the new EUR 27 billion is 6%, this translates into EUR 1.6 billion / year (3) Assuming an additional 3% cost of borrowing on the EUR 27 billion to be refinanced in 2010, it adds EUR 800 million.

http://marketsandbeyond.blogspot.com/

http://www.pcgwm.com/

3

All together, it represents a supplementary cost of +/- EUR 3.4 billion for the budget, wiping out 70% of the 4.8 billion additional austerity cut announced by the Greek Government early March (all these are assumptions since I did not find any information regarding swaps on the Greek Public Debt Management Agency web site, but I am pretty sure I am conservative). And the Q1 10/Q1 09 40% narrowing of the budget deficit to EUR 4.3 billion will not solve the insolvency Greece is rapidly facing. Liar’s poker players will have to show their hand soon, very soon, and maybe as soon as next week. The eurozone 25th March gamble failed spectacularly as expected: politicians do not want to understand that markets want hard facts not rhetoric and expedients.

Source: Greek Debt Office http://www.greekdebtoffice.com/%28S%28v54her3a0gplezalr3rbxc45%29%29/StaticPage6.aspx?pagenb=458 Bloomberg: Greece Yield Unattractive Even Over 7%, Clarida Says http://www.bloomberg.com/apps/news?sid=aYKMLSTbHyUc&pid=20601087

http://marketsandbeyond.blogspot.com/

http://www.pcgwm.com/

4

Bloomberg: Greece Credit-Default Swaps Rise Above Iceland’s for First Time http://www.bloomberg.com/apps/news?sid=aFJn8xdk4CwA&pid=20601087 Bloomberg: Greek Bonds Drop a 7th Day; Bund Spread Widens on Budget Woes http://www.bloomberg.com/apps/news?sid=aSWCod41Ms88&pid=20601087 Forbes: Leaking Greek banks http://www.forbes.com/2010/04/08/europe-briefing-midday-markets-economy-greece-bonds-banks-deposits_2.html Bloomberg: Greece Seen Likely to Seek Rescue After EU ‘Gamble’ http://www.bloomberg.com/apps/news?sid=aY66KXVsZJuY&pid=20601087 FTAlphaville: Is this Greece’s point of no return? http://ftalphaville.ft.com/blog/2010/04/08/198186/greece-is-this-the-point-of-no-return/ Bloomberg: Greece First-Quarter Budget Deficit Falls 40 Percent http://www.bloomberg.com/apps/news?sid=a8D0MXAXp53Y&pid=20601087