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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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  • The Hellenics Play "Quien Es Mas Macho?" 0 comments
    Oct 28, 2012 11:38 PM

    For those who enjoy high-stakes financial drama, there is an exciting contest going on now between Cyprus and Greece as to who can push the Troika the furthest without turning it away for good. Neither country has yet been able to make the Troika "agree" to its "demands", as if this were a business transaction between equals.

    "The troika has not accepted the Democratic Left's demands," the Greek finance minister informed the media. The DL, one of the coalition partners, has refused to agree to the labor reforms required by the Troika. "The EU is obliged to change the ways and means of addressing the crisis," Cyprus president Dimitris Christofias grandly declared to his people, as if he had a say in the matter. The Troika got so frustrated with the Cypriots' refusal to agree to labor reforms that it flew home and has not scheduled a return visit. Christofias said that he expected the troika to return "as soon as possible". That was last week, and the Troika still hasn't called him back to set a date.

    Both countries are supposed to run out of cash in mid-November, so they are dancing on the edge of the precipice. They know that Europe will agree to almost anything to prevent them from leaving the eurozone, which they think gives them leverage.

    They are playing a very risky game, because it isn't Europe who has the final say on whether they get the money or not. That rests with the elected representatives of the very stingy German and Finnish people, who have reserved the veto power to themselves. A few emollient phone calls from Hollande or Monti, or a few desperate phone calls from Athens or Nicosia, are unlikely to sway many votes in Helsinki or Berlin.

    The backdrop to these discussions is the fact that both economies are in free-fall, and that relying on their published statistics requires an act of faith that only a devout eurocrat could summon. I think that their economies are shrinking faster than reported; I think that their governmental cash receipts are declining rapidly despite tax hikes; and I think that their true fiscal deficits are frighteningly large and growing. I believe myself over their reported statistics.

    If there is one thing that I learned in the credit business, it is that the financial statistics of bankrupt companies and countries always turn out to be, shall we say, not 100% accurate in retrospect. If you rely exclusively upon reported numbers, you may be seriously misled. Of course, in the case of Greece, it doesn't take a Mensa member to know that they cook their books and prosecute their statisticians for not cooking them adequately. In the case of Cyprus, I lack such anecdotal data, but I suspect the worst.

    Anyway, D-Day is supposed to be November 12th, when the eurozone finance ministers meet in Brussels. The plan is that the Troika will have the Greek and Cypriot agreements in hand for the ministers to review. That is only ten business days from now, so suspense is starting to build.

    We know that Merkel wants to present the Bundestag with a neatly-wrapped package deal for all of the bailouts at once: Greece, Cyprus, Spain. That can't happen because the Hellenics need their money right now, whereas Spain hasn't even applied yet. So Merkel will be forced to ask the Bundestag to OK the distasteful Hellenic deals on their own. That will be a bitter pill for the German people and media to swallow. Sadly, I am not an expert in Finnish politics, so I can't handicap the parliament's vote on the bailouts, but I have to imagine that they won't pass by general acclamation.

    Whose idea was it to give voters a say in such important matters?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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