The Greek debate is ending today, and at 7am the vote will be taken on the new package of austerity measures. The market’s behavior yesterday – strong commodities and stocks (+1.3%), 10y Treasury yields back over 3%, and the dollar marginally weaker – suggests that the consensus bet was on “it will pass,” leaving most remaining surprises pretty much one way.
Of course, the vote is just the first step, but a great analysis by my friend (and very seasoned credit markets observer) Peter Tchir suggests that the deal is much better for banks than they are making it sound. His article is worth reading in full, but his summary of the consequences of the plan (note that the “Troika” is slang for the IMF/EU/ECB triumvirate) follows:
Working through the details as best possible shows it strengthens the positions of the banks and weakens the IMF/EU/ECB (“Troika”) and is expensive for Greece. The consequences of the rollover plan are that:
- The Troika has to provide more money up-front without being able to enforce austerity compliance.
- The Troika is more likely to continue to fund Greece longer than it would otherwise because of the additional up-front payment and the moral suasion the banks will use to encourage further use of public funds.
- Greek interest payments will go up, and with the GDP kicker, will be almost 2.5 times what they are currently scheduled to be and are in line with existing Greek long bond yields.
The rending of clothing and wailing and gnashing of teeth that we are reading daily in statements from bankers really had me going, but after reading Peter’s column I’m not sure why I wouldn’t want to do what the banks are being “asked” to do, given the likely alternatives. And, arguably, that might make it a voluntary rollover, or certainly an easier argument can be made that it may be.
By the same token, though, the terms are much worse for Greece than they appear, again if Peter is right. It becomes much less clear why Greece would want to do the deal, unless politicians think it is sufficient to kick the can down the road past the end of their terms. After all, the point of restructuring is to reduce a debt burden to make default unnecessary, not to increase the burden or to keep it the same. I suppose that all of this presupposes that Greece actually will implement the reforms they vote to approve, and that they’ll actually pay the amounts they are scheduled to pay. But who is going to make them do so, if they decide (post-receipt of the money) to renege?
In any case, there are a lot of interested parties here, and that makes it very difficult to pull off the trick. Cartels tend to fracture because there is a big incentive to be the first cheater, and a similar maxim applies here. Nobody better blink, or all of these team players are going to throw each other under the bus to reach the door.
All of this is happening with month-end and quarter-end just a couple of days away, and a long weekend to follow. As one indication, albeit anecdotal, of the thinning activity, hits to my website and commentary yesterday were already down by more than half compared to the usual Tuesday amounts. Liquidity over the next couple of days is going to be bad and risk budgets rigid, so there better not be many surprises.
On the economic-data front, Consumer Confidence came in a bit below expectations at 58.5, which is the lowest of the year and with Jobs Hard To Get essentially unchanged (up to 43.8 from 43.5). As I suspected, though, the market didn’t much care about this with the Greek vote only one day away. A 50.0 might have gotten folks excited; a 2-point miss isn’t going to do it.
There is no doubt that the technical condition of the market is vastly better today than it was just a week or two ago. Stocks have bounced multiple times off the 200-day moving average and remained above the year’s lows set in March. The S&P is threatening to break above last week’s high, which would yell ‘double bottom’ to techies and would certainly be an upbeat development. The dollar index never broke appreciably above 76.00, which represented last year’s lows. The 10y note tried to put the screws to Mr. Gross, but is falling back and the 3-month downtrend in yields is surely exhausted.
But all of these markets are in ‘neutral.’ Only bonds have recently been in any kind of significant trend, which makes further rally less likely, but the other markets I mentioned could very easily set significant reversals or extend their most-recent moves. While I don’t think that the Greek vote is going to turn out to be the most important point of this crisis (unless, of course, the austerity package is actually defeated), the combination of neutrally-situated markets and likely thin market conditions means that it could well be an important technical moment we are approaching. I wouldn’t feel comfortable at this moment with a long or short position in any market except for the possible exception of being slightly short bonds further out the U.S. curve…but if a real crisis hits, those bonds will be hard to buy back.