Blain Calls For Greece Conference Call: Book Your Place Now

Newedge – Blain’s Morning Porridge – January 26 2012

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033; E: Bill.Blain@newedge.com

How many Olives in Bubble & Squeak? – Conference Friday to discuss

US rates on hold for next two years. Merkel begging the Davos leaders for time to solve the crisis…but time is not a commodity. It just happens…with monotonous regularity. I was told by a good friend yesterday they don’t talk about risk on/risk off anymore, but since everything remains a guessing game they use ‘fear on/fear off’.

Inevitably, Ireland, Portugal and Greece are headlining the news - but for very different reasons:

Ireland

The good news is Ireland is back in the global funding markets - albeit for a tender exchange! But the fact it was able to extend €3.5bn of bonds is a massive positive. Well done Auntie Mae, Ireland's DMO. Although our favourite Irish broker believes the terms were tight and it could have been even more of a success, Ireland is out of the emergency room and learning to walk again. Irish 10-year yields peaked at 15% in July, but have now fallen to 7% - where Italy was recently. That's impressive considering how bleak the outlook was for Ireland last year, and the flight of investors furious after the ‘Great Irish Bank Heist’ left many suffering substantial losses after bank bail-ins.

What's worked for Ireland? Confidence in the political will to deliver target deficit cuts and debt reduction. An economy able to cope with extreme structural shock and still exhibit robust underlying strength, and recent growth. A workforce able to adapt to a crisis. Unfortunately, these are not conditions one immediately associates with the rest of Europe's peripheral PIGS.

What’s worked for Ireland are circumstances unique to Ireland and the Irish – so to expect European Austerity and Fiscal Stability Pacts will ensure similar results everywhere is just hokum. Has anyone explained that to Angela and her dedication to a rules-based euro…while everyone else games them?

Portugal

Portugal remains in the critical ward. It's a sell-a-thon as economic prospects dwindle, austerity and confidence collapses. Portugal will not be returning to market any time soon. Despite the ECB's liquidity bomb, there is little confidence the economy turns round. Look at the progression of Portugal yields – while Ireland spiked last year, Portugal has moved steadily higher. What's the difference to Italy or Spain? Well... Er.. (If you want the Graphs – easy to do on Bloomberg.)

Bubbles

And then there is Greece.

No one has actually called TOD, but it's likely to be soon. I was surprised to read in the FT the parties are close to agreement on haircuts. Are they? Who cares? I don't think it actually matters - ECB participation, the number of other investors taking the deal, whether the Germans and IMF agree it’s enough to put Greece's books in a recoverable state, or whether Greece still has the political will to push through the new package – these aspects are all still open to debate.

What are the likely outcomes? I stress this is just a guess and my views on Greece are subject to moment by moment change, but I suspect even if a PSI deal is agreed it will garner insufficient take-up to effectively reduce the debt load, so the Greeks will make a formal offer along roughly the same terms. Investors will be offered something similar like 15% cash, 35% 30-year bonds yielding 3.5%. These new bonds will be English law international GREECE bonds. It will be made clear participation is voluntary, but no guarantee further coercive action won't follow.

Following the exchange, the IMF and Germany et al, will agree further action is still required. Then we move into a managed default/restructuring stage. Holdout investors will get hit with an enforced GGB restructuring under Greek law - they won’t get much. But it will trigger CDS. (Then there is the issue of cross-default to Greece international bonds which may remain current. I suspect the reference entity on most Greek CDS is Greece which includes all obligations like GGBs and Greece international bonds. Any CDS/ISDA experts please advise me. I suspect it’s a win win for GREECE holders?)

I suspect holders of the new international Greece bonds will remain current and paying – although they will crash in value. That new GREECE bonds remain current is critical. That means Greek banks, which will certainly take the PSI exchange, can still pledge to ECB and remain (theoretically) solvent, thus avoiding a Greek bank meltdown and potential systemic contagion collapse across Europe. (Even better if it happens around the time of the next ECB LTRO at the end of Feb - just in case we see any other associated problems across Europe's banks.)

Which means the ECB should probably participate as well. Then it can join the fiction GGB default is just sensible restructuring and that they hold the new safe GREECE bonds. (And it will avoid the crisis of an ECB holdout getting privileged preferred creditor status causing an even larger crisis by effectively subordinating all Investors on all eurozone debt. Note to Angela: after a crisis marked by a succession of bad decisions, making the ECB a holdout would be really standout stupid.)

Of course such a stage-managed Greek restructuring is all window-dressing. Europe's growth problems will remain. Not every country can do as well as Ireland.

Greece Conference Call

On Greece we are thinking of putting together a conference call on Friday afternoon to examine i) what is happening, ii) what’s not happening, iii) likely outcomes, and iv) what options will be available for creditors. I'm hoping a leading global financial restructuring lawyer will join me to co-host the call. We will be making it highly interactive for investors - who will be encouraged to share their views.

If you are interested, contact myself directly on email. I'm targetting Friday afternoon London Time.

Out of time