For Greece, "Tomorrow" Has Arrived

Tomorrow Has Arrived

The day dawns with a deal for Greece that is full of smoke and mirrors; lies and deceptions. It is a deal pretty much as expected and, as I have said before, now the realities are going to be confronted. Europe has spun the agreement and the Euro has rallied some and the S&P futures are up but the next few weeks, I am afraid, will hold some serious disappointments. The page turns today because now we are about to confront not what is told to us but the actuality of what has been presented to us and just what will happen as a result.

How many European Union officials does it take to change a light bulb?

None. There is nothing wrong with the light bulb; its condition is improving every day. Any reports of its lack of incandescence are an illusional spin from people that unfortunately know how to add and subtract. Illuminating rooms is hard work. That light bulb has served honorably, and anything Mark Grant says undermines the lighting effort.

The Smoke and Mirrors

The IMF has not yet stated what its contribution will be to Greece and will not, they tell us, until the middle of March so that we will not know until then the real size of the bailout. The much promoted $176Bn bailout may not be accurate if the IMF pulls back on their allocation.

The projections for the growth of Greece, even in the leaked document provided by Reuters, utilize assumptions that will not be met, which has been the case every time, each time, for the last two years so that fuzzy math is being touted once again and the new/new projections will, in my opinion, come nowhere close to the truth.

The IIF agreed to further cuts last night for private investors, which no one but they have agreed to, so that shortly we will see how many institutions go along with the scheme and how many will sue as a result of the forced haircut that cuts about 74% from Net Present Value. We will also see law suits in London concerning the $18Bn of Greek debt that is governed under British law which may have quite interesting results. The Troika’s projections rest upon a 95% participation by private investors and I think they are living in a dream state if this is their expectation. In a Reuter’s article this morning they report: "The 32 members of the IIF's larger creditors' committee had a least 44 billion in euros in residual holdings.” If this is correct then the IIF is only representing 12.2% of the Greek bondholders.

The ECB has swapped their bonds with Greece and taken a senior position to private bond holders clearly indicating that they can swap their bonds with a sovereign nation to change any clause they do not like and if they can do it with Greece they obviously can do it with any other nation so that we will soon see law suits challenging this operation. We may also see, as a result of this, some institutions not subject to European manipulation, selling their positions as they do not wish to be subordinated to the whims of the ECB. I would also make note that the ratings agencies may take due note of this action and might reduce the ratings of all of the sovereign nations in Europe based upon this action. In evaluating a sovereign there is credit risk and political risk and I assert that the political risk has now been greatly magnified.

The ECB tell us that they will give their profits on the Greek bonds bank to the European central banks except there are no profits, only severe losses presently, so that all of this talk of profits is really the expectation of getting their money back at maturity which is years away. Their claim in the Press is not just misleading but an outright charade of mis-direction.

Greece will shortly be placed into “Default” by S&P and Fitch which will trigger default language in all kinds of securitizations including Greece’s $90Bn in derivatives and may cause disgorgement from accounts that are forbidden to hold defaulted bonds.

After the country has been placed into “Default” the banks will soon follow and once again there will be all kinds of consequences in interbank lending, securitizations, collateral agreements et al from all of this.

The CDS contracts for Greece may or may not function as they stand but, as I am quite certain will happen, not enough bond holders tender their bonds for the new debt so that Greece will pass the “Collective Action Clause” which will certainly trigger CDS in my opinion and if not will show the fallacy of that market.

The structure of the deal puts the IMF/EU/ECB clearly in control of the finances of Greece so they have replaced some sort of Czar with the bureaucrats of the Troika and the country no longer will control its own finances as they traded away their sovereignty for cash. In fact, an escrow account will be set up for Greece which will be controlled by the Troika and Greece is being forced to change their Constitution pledging to pay their creditors before providing any money for the country. A quick study of the math reveals that Greece will get about 19 cents on the Dollar and the rest of the money is the sovereign nations of Europe paying back their banks with the money they have supposedly lent to Greece. Greece is now nothing more than a conduit for the nations of Europe to pay back their own financial institutions.

Now we will see if the Parliaments in Europe will go along with this plan as many still have to approve it and a careful reading of the math involved here may be troubling for some governments especially Finland and the Netherlands.

We will also see, with Greek elections looming, how the citizens react to all of this either in the polling booths or in the streets as an additional $4Bn of spending cuts have been mandated by the Troika and they state that the money will not be paid to Greece until they are implemented which must be by the end of February.

The total outstanding debt for Greece will now rise to $1.270Tn as new debt pays off old debt in a country with substantial negative growth so that the real situation, regardless of what we are told, worsens.

In early May Greece faces its next bond payments so there may be a re-do for all of this in several months’ time.

If Greece is actually going to get the next round of the bailout then the other side of the coin is the increased debt being taken on by the other countries in Europe which could cause more downgrades as the new debt to GDP numbers are assessed.

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