Peace In Our Time

Markets are rallying on the back of Greece’s approval of the austerity measures, and all I can think of is the ill-timed 1938 speech by Neville Chamberlain.  But analyzing that leads to dark places, far too dark for a Monday morning when the markets are up.  So I’ll try and lighten the mood, and only think about a book with talking animals – Animal Farm:

Do not imagine, comrades, that leadership is a pleasure. On the contrary, it is a deep and heavy responsibility. No one believes more firmly than Comrade Napoleon that all animals are equal. He would be only too happy to let you make your decisions for yourselves. But sometimes you might make the wrong decisions, comrades, and then where should we be?

Why do I find it so easy to imagine those words coming out of some technocrat’s mouth?  Why are the Greek people faced with bailout or chaos?  There has never been an alternative to the bailout since no politician has worked on one.  There is plenty of historical evidence showing that countries can default, and not just survive, but thrive.  There are examples of countries letting the banking system fail for their mistakes yet the country has come back stronger than ever (Iceland most recently).  Yet all we get is politicians, inside and outside of Greece saying that not accepting the terms and getting more bailout money would be catastrophe, without a shred of evidence to back that up.  The best part of this, is that Greece would need to spend money to analyze and prepare for bankruptcy, but they have no money.  Sure the EU gives them as much money as they need to fly back and forth to summits, but letting them spend money that may make them go against the plan, well, that’s another story.

While we wait for the next phases of the Greek drama – EU approval of bailouts because of the effort of their technocrat, and PSI announcements, we can focus on the other big lending decision.  Just how much LTRO to take down.  Bankers in Europe are just bunching up the remains of their lunch to throw in the trash and can sit down and attend meetings determining how much LTRO money they will need and the best way to front run it.  Collateral requirements have been reduced – not quite to the point where the banks could pack up the lunch trash and drag it down to the ECB for some money, but headed that direction.

There are no strings on the 1% money from LTRO.  No “austerity” conditions.  Just borrow it and spend.  There are various estimates on how much banks will save in interest costs, with somewhere around 3% sounding about right.  So banks will earn an extra 3% per annum on the assets they buy with LTRO money.  If they anticipate correctly the huge demand (some estimates that this one will be a trillion) they can scoop up assets in advance.  Italian 5 year bonds are up 10 points since LTRO – that is more than 3 years of carry.  So many people get lost in the world of carry and forget how long and slow that is, and how much more important and immediate mark to market is (or at least the perception of mark to market is in this European banking world of accrual accounting).

I continue to believe the next LTRO will be smaller than the first one and that will disappoint the market, but the anticipation ahead of it, coupled with the “success” of Greece may be enough to push markets higher.  I remain highly skeptical and will continue to fade rallies, but will be quick to take some profits on those fades.

And of course, in between starting to write this and finishing, good old Olli Rehn managed to mention how much worse a default would be for Greece (again with no facts) and that it would have caused a chain reaction for Europe.  Last week, the official lines were that the firewall was ready and it was all priced in (immediately disseminated), but now that the masters want to approve aid, they have to mention it could be dangerous not to give the money.  Many of the same people will flip-flop on the issue, but their words will be sent around without hesitation.  Maybe some American Election coverage people can come to Europe.  If they think Mitt flip-flops, they would have a field day with the European politicians (and there are a lot of them).

I think this will be another interesting week, but think the celebration is premature, and possibly way off base as there is a deeper and growing problem bubbling below the surface.  That and the markets for a few minutes actually paid attention to weakness in China and Japan and the fact that TEPCO was getting  even more of its own bailout money to pay for damages from the nuclear power plant problem (that has been getting downplayed for a year).