The Greek bailout saga: another delay in store?

The market continues to look for a Greek bailout deal “any day now”, but are the negotiating parties actually about to buy another delay of several weeks rather than a mere few days?

There are three options on the table for the never-ending Greece bailout saga.

1. A bridge loan for Greece to get it through the March 20th deadline and the EUR 14.5 billion bond payment. This would be cheap in financing costs but extremely expensive in political terms as it will show case the huge gap between Greece and the EU (read: Germany). Yesterday’s exchange of words from officials in Greece and Germany did not exactly follow diplomatic protocol or statesman-like conduct. Never the less the frustration on both sides is valid and understandable. (A sign that a bride loan is a real possibility is the fact that bonds expiring on March 20th are trading @ 43.35 today after seeing 38.00 earlier this month (see chart below)

Source: Bloomberg LLP

2. Soft-default – By Monday, the EU does a managed default of Greece – leaving some emergency loans in place and unlimited liquidity being offered to float the market to avoid risk contagion across the EU. The question here is whether it can contain Portugal, Ireland and Spain from the turbulence? The outcome in this scenario depends on the construction of the “soft-default” – and with politicians it’s a guessing game not worth one’s time as they are notoriously irrational. I doubt this will be the choice as the upcoming elections in Greece and France call for more delays and buying time.

3. Greece takes things in their own hands and leaves the Euro-zone. Again unlikely as the whole political spectrum supports avoiding talk of what should and will happen no later than May/June. They want to have the “free money” before the election so they can focus on their own election platforms. They do not want to be the ones who forced the issue before the elections and therefore have the blame pinned on them by the electorate. The risk here is the war of words being exchanged – and damage the willingness to do anything at all.

I personally think the politicians will go for the worst solution, i.e., buying more time, as it’s the only way the politicians feel they can control the domestic agenda both in Greece and in Europe. They do not want to implement any solution which entails asking local parliaments in Germany, Finland or Netherlands to ratify before the Greek and French election is done, but it is also the most risky scenario as it risks further aggravating Greek social unrest and I doubt the market will perceive it as a good solution. We now need to create a bail-out for the bail-out which follows the Plan for a Plan to have a plan. No wonder the market is confused and focuses only on the infinite liquidity created.

Markets:

EURUSD: Took profit in EURUSD @ 1.2986 from short from 1.3248.
S&P: Short 1345.00 from y-day – Stop @ 1375.00
Fixed Income: See spreads widening.
Oil: Like it…. Geo-political risk premium will continue to rise.
Gold: Keep the patience. More QE is coming from everywhere.

The main game is buying time. The main way to do this is by printing infinite amounts of money – and this will “feel good”, but the price is terrible.

Safe travels,

Steen