Friday, 21 September 2018

On the Greek busted flush and the Cypriot wildcard

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I have written so much on the subject over the past two and a half years that the Greek story fits like a comfortable pair of slippers and fills column inches all on its own. The key eurozone authorities first tried a verbal bail-out which failed, then they had a bash at a forced private sector only bail-out and now they are faced with having to think the unthinkable and take a massive hit at public sector level too.

Anthony Peters, SwissInvest Strategist

What part of “Greece is bust” did they not understand two and a half years ago?

I heard Dr Christian Schulz of Berenberg Bank on the news this morning in which he postulated that the Greeks have done all they have been asked to do and that it is now the time for the creditor nations to do their bit in return. This followed an appearance by his boss, Dr Holger Schmieding on Bloomberg Radio yesterday in which he suggested, not entirely without reason, that the country needs to bin austerity, reform the business environment and get on with growing again.

Great ideas but easy for both of them to say as they live in London and are paying taxes here and not back at base in Hamburg.

The PSI which instituted the haircut for banks and other non-governmental investors is well and good but the proportion of debt held in private hands is now minimal and without the ECB and others fully biting the bullet, it’s all for nought.

Let’s admit that in reality the most valuable part of a Greek bond is now probably the paper it’s printed on

I might be behind the curve but if my memory serves me right, the paid up capital of the ECB might not be sufficient to take a major write-down on its Greek holdings. So the arguments between the IMF and the EU will go on as to how to turn a cow pat into butter. Looks like butter, spreads like butter but still tastes like…

However, while Greece is making most of the main headlines today, the “all for one and one for all” Eurozone policy has another candidate chewing at its principles. Little Cyprus with its communist government and love affair with Russia has got close to telling the Troika to take a running jump. According to the Cyprus Mail, the negotiation on a bailout are in full swing. The natural gas reserves which have been found off the Cyprus coast and the sense of Vladimir Putin breathing down their necks have served to wind up the lenders rather than the borrowers. The key issue in Cyprus remains the state of the banks with their own crippling exposure to Greece.

There are many who now believe that a second haircut is both inevitable and imminent under the PSI – let’s admit that in reality the most valuable part of a Greek bond is now probably the paper it’s printed on – and that the European banking system is robust enough to deal with this. The “banking system” as a whole may be but the Cypriot banks are not. Another diminution of sovereign asset values would finally kick the stool out from under them.

All trumps

As I have noted before when looking at the Cypriot conundrum, by placing themselves on the geopolitical chessboard they have given the creditor nations a further headache they could have well done without. Added to that, the assertion that Greece will never be expelled from the eurozone has given Cyprus a free option, a fist full of trumps, and it is being utterly ruthless in playing them.

The Troika needs to make sure that this does not develop into the straw which breaks the camel’s back and AKEL, the Cypriot communist party, know this. Andos Kyprianou, the AKEL leader, voiced this in saying, “Some important pending issues are vital for us to be able to agree,” and that these issues concerned natural gas management. “The big question is whether we are prepared to concede our sovereign rights to anyone outside Cyprus.” Whoever said that beggars can’t be choosers?

Closer to home, equity markets rallied out of sight on Monday with the S&P gaining 2% and Italy making over 3% in the session. Again it was the US housing market making the positive headlines with stronger than forecast existing home sales. But the overshoot in actuals versus the forecast in October was identical to the downward revision of the previous number for September. Was I the only person to see that?

Today’s housing starts and building permits will be of greater value though. They are expecting to be weakish but on the back of some stunning figures in September, this will not be a surprise. I’d be tempted to place more value on the revision than on the new number.

What a shame though that Spain can’t export some of its one million completed but unsold units to the Yanks.

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