Peter Tchir

Well played Mr. Papandreou

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It was almost funny how quiet he was at the summit. It seems like he sat back, got the best deal he possibly could for Greece and now Greece can decide if it is good enough.

The IIF and their NPV calculations. The ECB and their paid in full demands. The EU and their austerity and controls and demands over which Greek assets can be sold to whom? Debt to GDP of 120% by 2020.

How about debt to GDP of 10% by year end? How about some nice asset sales to China at premium prices not only to get some immediate funds but to develop a nice long term relationships with deep pockets and a great trade partner. Not sure where IMF fits in.

All along I have argued it was Greece’s choice to default or not and that it was in their best interest to do it. He played it far better than I could have. He holds the cards. He is putting his people and national interest above Europe. Merkozy must be in a panic.

This may just be a ploy to get a better deal, but I think it is great for Greece. It’s horrible for the bailout as every other nation in trouble may take similar steps.

I would be very careful buying Italian CDS as they could redenominate their bonds in LIRE and it wouldn’t be a Credit Event (our reading of the doc is that G-8 nations have that right – but trying to confirm)


Italian 5 year bond yields hit 6.24% that is 37 bps higher on the day. The spread to bunds moved 56 bps. 10 year Italy «only» yields 6.32% – that is getting scary flat. The front end isn’t as flat, but 2 year Italian yields spiked to 5.5% (55 bps on the day).

If Thursday didn’t teach us that you can’t let price action tell you whether a «grand plan» is good or not, I would watch this very carefully. Yield curve flattening is a big deal and a critical step in the deterioration of the credit worthiness of an entity (the 1st lost from the EFSF may be gaining in value, but who wants the more and more likely 2nd loss?).

I once again would be concerned about getting too short Italy via CDS. It looks like Italy could re-denominate the debt (as a G-8 country) back into Lire and it would NOT be a CDS Credit Event. It might be a lot of other things, but Credit Event is not one of them. Everything I have read over the past couple of weeks coming out of Italy, tells me that if there was one country prepared to «screw» the Euro and go it alone, it would be Italy. They don’t like Merkozy treating them like children, and they have a big enough economy that a dirt cheap Lire would make exports possible, and while foreigner bond holders might lose on a forced convergence to Lire, Italian banks and pension funds could at least pretend they are getting paid in full. China did send delegates to Italy not so long ago, if I remember. Maybe it wasn’t part of a save Europe project, as much as it was a what bargains can we find in Italy trip? A really strong Deutsche mark might not even both export oriented China as it would make German goods less competitive at the time China is trying to step up their manufacturing to a higher level of quality.

Germany may regret wasting the last 18 months trying to save the Euro and not doing enough to save themselves.

This scenario is clearly far fetched, but if we are going to think out of the box, not every possible outcome is good. And this would be good for Italy and China.

Copyright © 2011 · Peter Tchir

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