Act II: We have been writing about the Hellenic Republic for several months – the ultimate resolution is much as we anticipated, however we miscalculated how long Act II would last.
From the February 3 Divergent View:
We have resisted the all too obvious references to a certain type of Greek theater when describing the goings on in the Hellenic Republic. Although we refuse to succumb to temptation, there is a device employed by the chorus – during the aforementioned nameless art form – which signaled a turning point.
Antistrophe – roughly translated – means counter-turning or counter-circling and was the device used by the Greek chorus to indicate a time of change. Importantly it was only the second of three acts by the chorus. Today, we find the global markets at just such a point.
At that point in time we thought a bail-out, rescue package or financial help was only a matter of days away. A month later we are still waiting – nonetheless it does appear the EU and Greece are heading toward an agreement.
More importantly, the market is beginning to believe in the resolution of the Greek debt problems. For the first time in a month Greek bond spreads over German Bunds have dropped below 300 bps – bringing Greece’s borrowing cost much closer to the rest of Europe.
As the bond spread compresses, it is likely Greece will come to market with a 10 year bond deal. A press conference is scheduled for Friday with Angela Merkel in Berlin as Act II ends.
If the “bail-out” includes debt guarantees by German banks then we would argue Greek bonds are the equivalent of German Bunds. We suspect the market will not see it this way for one very good reason – public acceptance of austerity measures. Greek leaders agreed to austerity measures because they have no other choice – European leaders will agree to backstop Greece because they have no other choice – BUT public acceptance is the wild card. Act III will be focused on implementation of the new budgetary measures.
Act III
Despite Greek and European officials having no choice in the matter, they have done a remarkable job of heightening the drama. Almost two months of name calling, insults and threats have culminated in this week’s turning point. While Act II is ending there are signs Act III may be even more difficult to navigate. As the politicians meet, taxi drivers are on strike and blocking the streets of Athens – we expect to see more of this behavior as the government attempts to implement the belt tightening.
There is a bit of a ballet being performed by Greece and the EU – both understand that Greece needs to come to market with a debt deal within the next 6 weeks – the timing is key to the ultimate outcome of Act III.
If Greece receives the money before austerity measures are implemented then there is less of an incentive to actually enforce the new rules. Moreover, the general public will lose any sense of fiscal urgency (if that ever existed). It is for this reason that we shall be looking to take profits in National Bank of Greece (NBG), Credit Suisse (CS), Deutsche Bank (DB) and EWP as a debt deal nears.
The best outcome for our positions would be a debt deal this week – however, we would view this as a long term negative as it would erode any leverage the EU has over Greece’s belt tightening. The best outcome for our positions may not be the best outcome for the EU and the markets as a whole.
Disclosure: Long NBG, CS, DB, EWP
