Greek “voluntary” PSI deal equivalent to “obtaining a voluntary confession at the Spanish inquisition”

Greek “voluntary” PSI deal equivalent to “obtaining a voluntary confession at the Spanish inquisition” – CEO of Commerzbank

Australia recorded its 1st trade deficit (A$673mn) in 11 months in January – weaker iron ore (down 23%) and coal exports (down 5.5%). Economists had expected a surplus of A$1.5bn. The much weaker trade data emphasises just how depended the Australian economy is to mining exports, particularly to China. With a slowing China, well…. The A$ declined marginally (currently US$1.0620), but in my humble view, remains overvalued (For full disclosure purposes, I’m short the A$ against the US$). The data was impacted by Chinese New Year holidays and are unlikely to be as bad in coming months. However, if the figures continue to be poor (OK not as bad as January’s), it just reinforces my bearish view on China. Stay well away from the miners (I’m short as you know);

Chinese inflation declined to +3.2% YoY, in February, the slowest rise in 20 months and better than forecasts of a slowdown to +3.4% – lower food prices (around 60% of the inflation basket) were the main reason for the sharp decline. However, food prices are expected to rise – the good news is likely to be short lived, particular as oil is also rising. Factory production rose by +11.4% in Jan/Feb (+12.3% forecast), and retail sales rose by +14.7% (+17.6% forecast). Fixed asset investment for Jan/Feb (ex rural households) rose by +21.5%. Continuing talk about the authorities introducing stimulus measures – in my humble view unlikely (excluding a further reduction in RRR’s), given the continuing threat of inflation;

85.8% of private bondholders agreed to the PSI proposals in respect of bonds subject to Greek law. Following the activation of CAC’s, the participation rises to 95.7%. Once the CAC’s are triggered, some E177bn of Greek bonds (under Greek law) will be swapped for a cash payment of 15c on the Euro and new Greek bonds with a face value of 31.5% of the old bonds. However, only 69% of Greek bonds (14% of the total), subject to foreign law have agreed to accept the deal. The deadline for these bondholders has been extended till 23rd March. ISDA is to meet at 1.00pm GMT to decide whether it is a credit event – it will be amazing if they rule otherwise. Indeed, if they do not call a default, the CDS’s market is toast. However, another Greek default is inevitable. The new Greek bonds are trading at between 15c – 25c in grey markets (huge spread), though a clear sign of extreme distress. However, the deal meets the EU condition that at least 95% of all privately held bonds must be included in the restructuring – they may actually get their money from the EU/IMF.
The Greek PSI deal is the biggest Sovereign default ever.
Amusing statement by the CEO of Commerzbank re the “voluntary” PSI deal. To call it voluntary is the equivalent of “obtaining a voluntary confession at the Spanish inquisition”. poor chap – must have cost him.
There is also the issue of subordination, where debt held by the ECB is effectively treated in a different (better) way that that held by the private sector. Cant be good news and will have adverse consequences.
The Euro declined on the news – currently US$1.3220;

Mr Draghi defended the ECB’s LTRO programme vigorously, at yesterday’s press conference. He openly criticized remarks from the Bundesbank (Mr Weidmann), who have been critical of the LTRO – go for it Draghi, it really had to be said. Amusingly, Mr Draghi reported that some 460 German banks (out of the 800 who availed themselves of the ECB’s 3 year LTRO money) participated in the latest LTRO. Amusingly, Deutsche Bank (Mr Ackermann, who had been critical of the LTRO programme) helped themselves to between E5bn – E10bn, reports the FT. Uber Hypocrisy do you think. Personally, a number of people are getting fed up of German comments – I suggest the relevant German’s lock themselves in a room, draw the curtains and keep popping the pills and, in addition, “do their homework” as they are so keen to say to all and sundry.
More importantly, Draghi suggested that the ECB had done enough and it was now over to the politicians – I agree totally. He warned of an upside risk to inflation and was far less dovish than before – just reconfirms my view that inflation (globally) is becoming a problem (oil related mainly, which is at a record high in Euro/Sterling terms), though there is no way that the ECB will hike its interest rates above the current 1.0%;

Spanish 10 year bonds are yielding some 25bps more than the equivalent Italian bonds. The market has (finally got it). More importantly, the market will now focus on Portugal. In spite of denials by EU politicians and officials, a haircut of around 40%+ on Portuguese debt is inevitable – the 10 year is currently yielding just under 14%. Timing, maybe not this year as the IMF is to visit Portugal in September to assess their economy/financing requirements. However with debt to GDP expected to be around 100% and an economy slumping by an expected -5.0%+ this year, the current situation is unsustainable. I remain of the view that Spain poses the greatest threat to the EZ/Euro and, unfortunately, I see no solution. For full disclosure purposes, I’m short Spain;

French January factory output rose by just +0.3% MoM, weaker than the +0.5% expected. However, Decembers data was revised marginally higher (-1.3% from -1.4% previously).
Italy’s January industrial output declined by a much larger -2.5%, as opposed to an expected decline of just -0.8%.
Germany’s seasonally adjusted January trade surplus came in at E14.2bn, as opposed to E13.9bn in December and slightly higher than the E13.5bn forecast
German final February CPI came in at +0.7% MoM, or +2.3% YoY;

UK January industrial production declined sharply to -0.4% MoM, but +3.8% YoY, the biggest fall since November 2009. Manufacturing production rose by just +0.1% (+0.3% expected). February input prices rose by +2.1% MoM, or +7.3% YoY (+6.6% expected). Clear signs of inflationary input prices. However, output prices rose by a lower +0.6% MoM, or +4.1% YoY, slightly higher than the forecast +3.9%. UK data has been all over the place in recent months, but on balance, the situation seems be improving, though only very slowly;

All eyes on the US NFP data today. The warm Feb weather should be positive for construction jobs, in particular. However, recent indicies suggested a weaker labour component. Very difficult to assess. Yesterdays weekly unemployment data disappointed slightly. The forecast is for an increase of 210k (243k in January).


OK, Greece has achieved its PSI deal (though will have to default at some time in the future), but the market will focus on Portugal – in other words no respite.
Still feel the downside risk is greater – in any event the risk/reward is not in my favour in my humble view. As a result, I remain bearish.
The Euro, well its getting tiresome – still believe it will decline to US$1.30, indeed closer to E1.20 in my humble view.
Japanese markets rose above 10,000 today, but closed below – though still up +1.65%. Rather stupidly, I missed the recent rally. Having said that, in the medium to longer term, I continue to believe that Japan has extremely serious problems.

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