Greece: Slowly but Surely…

It is fascinating to hear financial pundits do their predictions for 2012. Surprise, surprise, fund managers are predicting that stocks will go up this year. Mercer surveyed 50 fund managers and they indicated that world and Canadian stocks will go up by 7%, US stocks will see 8% growth and Europe 6%! Based on what? No one knows but it is not very strategic to talk about the reality if you want to separate fools from their money.

Recently, fund managers were actually happy to see finally the rates going down for the PIIGS bonds. Confidence is coming back, they say. Well, I hope they understand that it is the ECB who’s doing the buying (printing) and that overnight, the fiscal situations of these countries have not improved. That should be pretty basic.

The ECB, with Goldmanites Draghi at the helm is making sure everybody understand that he is not directly monetizing the debt of the PIIGS with his LTRO (1%, 3 years loan to banks). This program is making debt issuance (under 3 years) appear “safe”, that is why yields have gone down. At the same time, the ECB balance sheet is growing exponentially? The ECB has added 1 T Euros of junk in 6 months to its balance sheet! That’s more than QE1 by the Fed! We can’t wait to see what happens when Draghi really begin to print!

I remember watching an interview with Olivier Sarkozy (French President’s half brother) of the Carlyle Group (you can’t get more insider than that) saying that the European banks will need at least 3-4 T Euros in recapitalization very short term (2012-2013). It looks like the ECB is well on its way and it also looks like Germany is still ok with printing to save the banking system. Ironically, with this amount of printing, the euro may go down and the European stock market may outperform the S&P! So much for those fund managers above!

France finally lost its AAA rating (and 9 other countries); nothing surprising there if you look at the amount of debt, it is actually surprising that they could keep the rating for that long. So much for the ratings agencies. The downgrades affected more the negotiations with Greece where the private creditors seem to be losing patience. Greece wants more haircuts and private creditors, not so much. Private creditors are resisting taking more than 50% loss on their bonds (what was agreed last Fall). You also have hedge funds that are resisting big time but for other reason: push for a default and cash in on their CDS. Private creditors, we should not forget, means Greek pension funds too. This will not be pleasant for Greeks.

The traditional Keynesian economists continue to throw their hands up in the air and asked for more liquidity to get through this. Remember the drill in ECON 101: deficits during recessions and surplus when all is swell. Well, it never worked that way and it is the reason why we are in this mess. It is still a solvency crisis and not a liquidity crisis. Unlike the “chicken of seas” captain of the Costa Concordia – remember – “the captain always goes down with the ship”, the Keynesians will stay on board and drown in the sea of insolvency.