Some thoughts on a Plan-B for Greece
Shah: Take a look at BTPs…
With negotiations between Greece and its creditors having stalled to the point where there has been a complete breakdown of communication attention has turned to the potential need for a Plan-B for Greece.
Eurozone FinMins over the weekend have acknowledged for the first time the need to discuss alternatives. This does not automatically mean a Grexit. Alternative scenarios to an exit include one or more of the following capital controls, early election or a missed payment.
More than these alternative scenarios what seems to be a preoccupation with EU/IMF/ECB policy makers outside of Greece is a desire to show that they were willing to reach an agreement but it was Greece that decided not to play ball. Instead of the ex-US President Truman style sign that “The buck stops here” we have it seems eurozone policy makers engaged in a game of pre-emptive “Passing the buck”.
For financial markets the central scenario is still one of ECB QE helping to limit contagion. But during Q2 there is a difference in how much QE can help relative to expected net issuance.
The supply/demand balance looks most attractive for Germany and is favourable for Spain but for Italy net issuance is greater than ECB QE.
An alternative to short 10y BTPs against Bunds is to take a look at short 10y BTPs against 10y SPGB.