Friday 10 September 2010

The Hangover...Some guys can't handle credit...

Socrates: “All I know is that I know nothing.”

Another must read this week, the latest from the author of Liar's poker and the Big Short, Michael Lewis in Vanity Fair:

"The tsunami of cheap credit that rolled across the planet between 2002 and 2007 has just now created a new opportunity for travel: financial-disaster tourism. The credit wasn’t just money, it was temptation. It offered entire societies the chance to reveal aspects of their characters they could not normally afford to indulge. Entire countries were told, “The lights are out, you can do whatever you want to do and no one will ever know.” What they wanted to do with money in the dark varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. The Germans wanted to be even more German; the Irish wanted to stop being Irish."

So true...I could not agree more with Michael Lewis.

Michael goes on:

"The resulting dumping of Greek bonds onto the market was, in the short term, no big deal, because the International Monetary Fund and the European Central Bank had between them agreed to lend Greece—a nation of about 11 million people, or two million fewer than Greater Los Angeles—up to $145 billion. In the short term Greece had been removed from the free financial markets and become a ward of other states.

That was the good news. The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions. Add it all up and you got about $1.2 trillion, or more than a quarter-million dollars for every working Greek. Against $1.2 trillion in debts, a $145 billion bailout was clearly more of a gesture than a solution. And those were just the official numbers; the truth is surely worse."

Some additional sobering facts about our dear European Greeks:

"In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn’t take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year."

Gee and we are lending some money to these guys? You've got to be kidding me...not.

At least the Greek banks were not as stupid as the other European and US ones in the subprime debacle:

"Virtually alone among Europe’s bankers, they did not buy U.S. subprime-backed bonds, or leverage themselves to the hilt, or pay themselves huge sums of money. The biggest problem the banks had was that they had lent roughly 30 billion euros to the Greek government—where it was stolen or squandered. In Greece the banks didn’t sink the country. The country sank the banks."


Here is another interesting fact about Greek politics during election, another courtesy of Michael Lewis great article:

“The first thing a government does in an election year is to pull the tax collectors off the streets.”

Lies damn lies and statistics:

“At Salomon we used to call [the head of the Greek National Statistical Service] ‘the Magician,’ ” says Xafa, “because of his ability to magically make inflation, the deficit, and the debt disappear.”

"In 2000, after a flurry of statistical manipulation, Greece hit the targets. To lower the budget deficit the Greek government moved all sorts of expenses (pensions, defense expenditures) off the books. To lower Greek inflation the government did things like freeze prices for electricity and water and other government-supplied goods, and cut taxes on gas, alcohol, and tobacco. Greek-government statisticians did things like remove (high-priced) tomatoes from the consumer price index on the day inflation was measured. “We went to see the guy who created all these numbers,” a former Wall Street analyst of European economies told me. “We could not stop laughing. He explained how he took out the lemons and put in the oranges. There was a lot of massaging of the index.”

And after joining the Euro, this is what the Greeks did with the help of Goldman Sachs (the guys that created the wonderful Abacus transaction as well...):

"To remain in the euro zone, they were meant, in theory, to maintain budget deficits below 3 percent of G.D.P.; in practice, all they had to do was cook the books to show that they were hitting the targets. Here, in 2001, entered Goldman Sachs, which engaged in a series of apparently legal but nonetheless repellent deals designed to hide the Greek government’s true level of indebtedness. For these trades Goldman Sachs—which, in effect, handed Greece a $1 billion loan—carved out a reported $300 million in fees. The machine that enabled Greece to borrow and spend at will was analogous to the machine created to launder the credit of the American subprime borrower—and the role of the American investment banker in the machine was the same. The investment bankers also taught the Greek-government officials how to securitize future receipts from the national lottery, highway tolls, airport landing fees, and even funds granted to the country by the European Union. Any future stream of income that could be identified was sold for cash up front, and spent."

So, there you have it, the big question on everyone's mind is about the possibility of a Greek Default. Can it happen and will it happen? The only people that can let it happen are the Greeks themselves and looking at their outstanding records, I am pretty sure you can guess by now what the answer is...

Everyone wants to believe Greeks will not dare to default, because it is more a convenient truth and more reassuring to think they will act wisely and will not dare the unimaginable:

The head of the Greek National Statistical Service wasn't nickamed the Magician for nothing.
The Greeks got it so well for so long because, as per Stephen Macnik a researcher from the Barrow Neurological Institute in Phoenix, Arizona, said in an article from Wired Science:

"Tricks work only because magicians know, at an intuitive level, how we look at the world"

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Stephen also adds:

"Even when we know we're going to be tricked, we still can't see it, which suggests that magicians are fooling the mind at a very deep level."

As reminder, this is a clear picture on the evolution of the 5 year CDS price for Greeces since January 2010:

Greece unfunded liabilities problem is massive, more than 800% of GDP!

10 year Greek Bond Yields are creeping up closer to record level of May:

A default of Greece is therefore clearly in the pipeline.

James Mackintosh in his column from the FT says a Greek default is unlikely in the next two years assuming the government can cling on to power. Buying one to two year great bonds might therefore be very tempting for high yield seeking investors, but it is not for the faint-hearted.,s01=1.html

For Ambrose Evans-Pritchard, in the Telegraph:

"Political doubts are also surfacing in Greece. This week's cabinet shuffle by premier George Papandreou is a tilt to the populist wing of the PASOK party, hinting at austerity fatigue after the economy shrank 1.8pc in the second quarter. The EU debt agency Eurostat said Athens has not yet provided documents on the country's hidden debts."

Ambrose indicates also:

"A column by Fintan O'Toole in the Irish Times said the problem had become too big for Ireland after rescue costs escalated to €25bn, and possibly higher. "The choice is now stark: do we go on being "good Europeans" at the cost of destroying our own society or do we become "bad Europeans", lose the trust of our European partners, but save ourselves?"

"There comes a point of existential crisis when even the meekest of countries has to put its vital national interests (first). We are at that point now," he said, deeming it the job of the ECB to shore up Anglo Irish if it thinks default poses systemic risk."

The Irish are more disciplined than the Greeks in tackling their difficulties and are already taking drastic actions in respect to their crippled banking industry and seriously damaged economy. The major issue with the current crisis is the very large amount of damage inflicted to the household balance sheet in many countries.

The road to recovery will be unfortunately very long for many Europeans countries.

The final question is how long can the Greeks, the Irish, the Portuguese, the Spanish people endure the pain of the hangover?

Reminder of the US Hangover for US my next post, I will look at Household Balance sheet and forward implications...not a rosy picture to say the least...

The 4 Trillion dollar hangover...

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