Sometimes we tend to engage in celebration without paying full attention to our surroundings or fully grasping the reason why we feel compelled to cheer. In the midst of the news that Greece’s life support was extended, we missed the fact that the hope lies in the fact that even after a 50% haircut, Greece will still have debt that will be 120% of GDP by 2020 – and that is a leap of faith. Or maybe we didn’t miss anything, and just felt compelled to party, anyway.
Let’s bring a bit of honesty and candidness to the forefront, and let’s accept the fact that there was nothing “voluntary” about the haircut. In other words, the bankers were given two choices: Either have a sit and get a decent haircut, or you will be forced to sit down and get your head shaved. In addition, being a “voluntary” acceptance of default is not default – go figure – and does not trigger the Credit Default Swaps -- CDS. I don't know who's holding what, but if there's a way around the CDS protection, what's the point of paying for insurance? Hadn't though about that!
As of today the details are still a bit murky, and as the weeks go by we’ll get to know exactly how the plan will unfold. But let’s not think that the problem is solved, and that we will go back to life as we knew it only because the overall debt is now slightly smaller. The more powerful European Financial Stability Facility (EFSF) will address every ill that will come their way, and recapitalizing the banks will fill in the gaps.
First and foremost, there are no growth prospects, and without growth more haircuts are on the way, only because without growth there’s not tax revenue to service the existing debt, and the debt keeps growing unless more haircuts take place or growth kicks in. There’s a mouth full.
In addition, the whole exercise centered on Greece, not the overall euro union debt issue, and there’s nothing in place to deal with the bigger countries, such as Italy and Spain, while Portugal is only killing time before stepping up to the plate.
So what’s missing? Everything. But killing time is an expertise that has been finessed over the last several months by the bureaucrats. Thus, the last thing in my mind is that the recent market "bullishness" is a sign that all is well, and only take these “normal” price discovery waves in stride while playing along.
According to The Wall Street Journal, Italian Prime Minister Silvio Berlusconi “called the euro a ‘strange’ currency.”
Speaking at a conference on foreign trade, Berlusconi said Italian government bond yields had risen above 6% Friday and were “under attack” because “nobody believes in the euro.”
If he only knew how “strange” it really is.