Greece: Clowns and Circuses are Getting Real

My twitter account will attest to my low opinion of Syriza's negotiating team, first and foremost the game-theory academic who clearly knows nothing about negotiating in the real world, Yanis Varoufakis. Note to this clown circus: when you are cash strapped, don’t flip-off or otherwise belittle the people who can throw you a lifeline or let you drown outright.

Related to this epic incompetence, I mentioned a compression trade that went down in flames a few weeks ago. It was a compression between NA high grade and Europe high grade CDS spreads. High grade is the place to express the trade: high yield is at this point concerned about its own idiosyncratic problems, not the macro-level stuff. Levered 3X at 10bps would pick up quick money on compression plus the premium on NA if Greece came front and center. I closed as ECB QE took the wind out of it. Since I threw in the towel, the tide appears to have turned. Not claiming to be right on the trade—poorly timed is the same thing as ill-conceived. There is no accrual accounting: this is all tier 1, mark-to-market trading.

Given the incredible incompetence of the Greek government even discounting their dire straights, I can’t see any feasible way out of this without default. And this will be terrible for Greece. For the rest of the ECB, not so much.

You see, the Greek negotiators have single-handedly made voters in Germany completely unwilling to support any relaxation of terms given to Greece. Not that Greece has offered any concrete terms. So the market is saying that corporate debt has been marginally underpriced in Europe given the risks, but there is no impending disaster for the rest of the EU.

The disaster is there for the Greeks though. You see, the Syriza solution is to retunr to the drachma and nationalize their banking system. This will pretty much clinch systemic defaults. Greece may run their printing presses and load up on kitty-litter drachmas and pretend like this will keep pensions and the hand-outs flowing unchecked, but this, pardon the expression, a load of crap. All you will get with a toilet paper currency is inflation. All you get from nationalizing the banking system is politicians telling business what hey can and can't do. It doesn’t resolve the external debt problem. Greek banks and corporations owe EUR and will continue to do so. Failure to pay in EUR which the Greek government cannot print will lead to widespread default.

There is no way to get away from the EUR even if you do print drachmas. Nobody will want them and will contract and use euros in spite of any political dictates. The Greek government’s solution is like a deluded Charlie Sheen on drug-infused bender: Banks will be nationalized and likely will institute capital controls.

Seriously? Can you not just consider throwing these clowns out and trying a more realistic approach?

The country has more debt than it can afford and it should get on with restructuring it. And sovereign bond investors should never forget that they are credit investors. Let’s hope the defaults are few and the recovery high.


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