Can Greece Get Financing without EuroZone?

Can Greece Get Financing without EuroZone?
Kiron Sarkar
September 10, 2011

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If (Greek) Government cant meet aid terms, “It’s up to Greece to figure out how to get financing without the Euro Zone’s help.”

-Mr Schaeuble German Finance Minister

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The above is a direct quote of the German Finance Minister, Mr. Schaeuble, during a closed door meeting of German politicians late last week. The Germans, as are most of the Euro Zone, completely fed up of the Greeks and, in any event, cannot rescue the Euro Zone – politically and financially impossible. Indeed, I would argue that the Germans have been uber generous to date, but even they do not have unlimited financial resources. The Troika (EU,CB and IMF) revisit Greece next week, to discuss Greece adherence (or lack of it, more precisely) to their fiscal commitments. The Greek PM and the Finance Minister now state that the Greeks will implement the terms of their aid package – they wont and, indeed, cant. Having lied to get into the Euro and having lied again and again and again and….., I cannot have any sympathy for the Greeks. Besides, did they really think they could survive within a currency union. However, I totally accept that Greece should have been allowed to default much earlier. Not only would it have been better for the Greeks, but it would also have been much, much cheaper. Once again, Trichet and the ECB were totally wrong – amazingly, they persist with this position.

Greece may just get a little more aid, as the Euro Zone still (unbelievably) have not figured out how to deal with a Greek default, but, as I have kept banging on, Greece will have to default this year.

The German’s are working on the basis that a Greek default will result in a haircut of 50% – it will be well above 70%, as they will discover soon enough. However, even though such a haircut is a certainty, the Euro Zone, including most European banks, can survive it – it will be painful, but they can get through it. Those who do not survive will be bailed out, but expect shareholders (and bondholders) to take the 1st hits this time – absolutely right in my view. However, what the European banks cannot survive is contagion spreading to Italy, Spain and other Euro Zone countries. As a result, the ECB will have to step up its purchases of Italian and Spanish bonds – it did last week. I believe it will – it has no other choice.

Legislation to authorise the changes to the Euro Zone’s bail out Fund, the EFSF, are likely to be passed by no earlier than October, though there are some who suggest it will take until December. Counter intuitively, it will be easier for Euro Zone countries to pass the EFSF legislation, if Greece defaults – the whole collateral issue (which is being demanded by the Finn’s) disappears. The next big issue is whether the Euro Zone can stop contagion spreading and, in addition, FINALLY face up to the fact that European banks need to be recapitalised, having, at least, started to address the whole issue of losses on Sovereign bonds holdings. There is no reason why the ECB cannot continue to buy the appropriate Euro Zone bonds – its has unlimited buying power. Indeed, if the focus switches to the EFSF, there will be more of a credibility issue, particularly as we all know, its size is limited to E440bn and there is little (current) inclination to increase its size.

Whilst the ECB has learnt that it must continue with its bond buying programme to gain the credibility that markets need, it clearly finds it difficult to admit that its 2 recent rate hikes of 25bps each were a huge mistake. Mr Trichet, last Thursday, stuck to his very boring line, though was far more dovish than the previous month, but his game is to preserve his reputation/legacy, rather than do the right thing and admit that he and the ECB made a mistake with their recent rate hikes (as they did in 2008, only to have to reverse them soon thereafter) and reverse its decision. That’s my problem with the Euro Zone/ECB – it is full of grossly overpaid bureaucrats, who are financial amateurs learning on the job and only very slowly.

I, for one, really cannot understand the market reaction to Stark’s resignation. It was great news in my opinion. Everyone knew he was opposed to the ECB’s purchases of peripheral Euro Zone bonds and was unhappy that his concerns were not being listened to. His likely replacement, Mr Jorg Asmussen, a State Secretary in the German Finance Ministry is far more canny, extremely competent and less a hardliner on monetary policy – exactly what you need at present. He is also extremely articulate and credible. I believe he is also close to the opposition German party, the SPD, who are more Euro Centric. I can understand the Euro weakening on the obvious fact that the ECB will have to reduce rates – most likely by 50bps by the year end. However, as we all know, Asian Central Banks (especially the Chinese) are buying the Euro, as will the SNB (to defend the E1.20 peg against the Swissy) shortly, as markets test the SNB’s resolve. However, the Euro remains fundamentally overvalued at these levels, in any event and, in my humble opinion, will decline further.

I am very much looking forward to the departure of Trichet, though I will miss him – having lost the dreadful former UK PM, Mr Gordon Brown, my other major bete noir, I am going to be at a loss if I cant find someone else to rant over. However, never fear, this is the Euro Zone and there will be plenty of up and coming candidates.

A number of people are calling for a break up of the Euro Zone – with a number of countries exiting the Euro. Personally, I have come to the conclusion that this is highly unlikely, with the exception of Portugal. The cost would outweigh the benefits. If on the other hand, Germany and a few other countries exited the Euro (as you cant kick anyone out), their resulting currency would be the equivalent of the Swissy, though even more liquid – the currency would soar and the German export industry would be crushed. Some countries may leave, (Greece), though Portugal looks exceedingly vulnerable, but the cost for most countries of exiting will be horrendous, both to themselves and the Euro Zone.

What happens next. Well the Euro Zone will cobble together another elastoplast kind of solution, which means we will head from 1 crisis to another – great for people like me who play this game, but really dreadful economically, particularly for the longer term. Eventually, the Euro Zone will issue Euro bonds, countries will have to meet predetermined fiscal targets, (which will be subject to verification), and which they will have to stick to, European banks will be recapitalised, etc, etc. Its just unfortunate that the politicians are incapable of sorting this out sooner and without the inevitable and increasing pain – indeed, the current situation is that they will only move when there is a crisis. Sheer lack of leadership. Totally criminal in my view.

Whilst the German’s will hate it, the Euro Zone will have to print money at some stage. It has been the traditional escape route in the past and will be again. In addition, the ECB will have to reduce the interest it pays on deposits held with it, as will the FED. Goldman’s talk about the FED, in addition to operation twist/QE3, announcing that interest rates will be linked to the unemployment rate. This weekends G7 meeting came out with the same platitudes and very little in terms of policy action. President Obama’s US$450bn plan sounds great, but I cant see the Republicans supporting it meaningfully. The worse the economy, the better their election chances. Government policy action is desperately needed as a matter of urgency – the markets cannot sort out this mess. However, it’s tough to see any sensible people/plan out there at the moment.

All of this is great for you gold bugs, though given the current and likely higher Gold price, I would have thought that the way to play it is through unhedged gold stocks (Gold miners are finally making money), rather than the commodity itself. My friends, who are totally plugged into this sector, suggest silver stocks will be an even better play – well they have been right so far.

Clearly, I remain bearish.

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For full disclosure purposes, I own a UK quoted silver company Fresnillo (ticker FRES). I also own a gold miner, Randgold (ticker RRS). Currently own only 2 other stocks, Potash Corporation (ticker POT) and Tullow Oil (ticker TLW). I’m short the Spanish and French markets – the IBEX and the CAC.

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Kiron Sarkar is a qualified UK accountant, Kiron joined the M&A dept of N M Rothschild in London. He was then appointed head of M&A of Rothschild (Hong Kong). On his return to the UK, he was a founding member of the Rothschild international privatisation team. Subsequently headed up the Central and Eastern European (“CEE”) team – rated No 1 in 4 out of 5 years (Privatisation International).

On leaving Rothschild, he worked as privatisation adviser to the UK Governments Know How Fund, which was established to advise Governments in CEE on policy, privatisation, economic, financial, regulatory and other issues. Subsequently European Head of Media, Tech and Telecoms at CIBC World markets. Following CIBC, Kiron advised on telecoms and energy deals in CEE.

Kiron has acted as a lead adviser in respect of over US$150bn of deals and has worked globally in both developed and emerging markets.