Notes From Underground

The news out of Europe continues to create volatility as EUROCRATS vacillate between defaults and bailouts. It seems that the Greeks will vote on a “new and improved” austerity package that, if accepted, will allow the EMU,IMF and ECB to provide the needed funds to get Greece through the immediate crisis.

Lies compounded by lies has made the situation much more difficult to comprehend. The problem is one of insolvency but because of the opaqueness of the entire EU, it is very difficult to ascertain who is in fact insolvent. Even though the European Union ran bank stress tests, very little is known about which banks will be insolvent in the event of a sovereign default. The biggest fear is that a Greek default will become contagious to the other peripheries and several of the large banks in France and Germany.

Another lie is that the EUROCRATS do not want the “EMPTY CREDITORS” [read speculators] to be paid out on a default so the Orwellian nature of Brussels is trying to manufacture a default by any other name. Today, the French government persuaded the large French banks to accept a type of BRADY BOND solution, which would extend the maturities of Greek debt in order to buy time for the credit hit to be spread out over time–deemed by the politicians to be a non-default. However, the ratings agencies have opined that any extension of duration would result in a DEFAULT.

The battle lines are being drawn between the nation-states and rating agencies. Interestingly, Frankfurt was looking into certifying a new European ratings group so the pressure will continue to build against S&P, Fitch and Moody’s. All the talk out of Brussels is totally devoid of the impact of domestic politics. It is the Greek Parliament who now holds Europe’s immediate financial fate in the raised hands of 151 Greek members of Parliament.

Democracy is still the prevailing means of political decision making and if the Greek politicos listen to the voices of dissent in Greece, the Parliament may well vote NO just to get Europe to raise the ante–sounds similar to the rejection of the first TARP vote in the U.S. HOUSE. The Greek nation has more to gain by pushing the DEFAULT game a bit further to maybe get some modicum of relief from the coming ravages of austerity.

The NEGATIVE FEDBACK LOOP that is perpetuated by an austere budget in a declining economy with no ability to devalue its currency may be too sadistic for a Greek populace staring into the abyss of financial contagion. Sadists of economic rectitude and the lies they promote have placed an already fragile global financial system into a very precarious predicament. Oh well, WEN will we have some certainty?!?!

For a quick update on the impact of austerity budgets:

Portugal 2/10: -260 basis points
Ireland 2/10: -135 basis points
Greece 2/10: -1114 basis points

These are the inverted curves of economies attempting to ring out the excesses of inflation. Unfortunately, economies in question do not have the problem of excess inflation but rather excess debt, which would normally call for negative real rates of return an steep curves.

As Brussels has dithered and deceived, the markets have exacted a price,a very high price. Where it all ends it is impossible to know but Athens will be the first test of the people versus the political elite of Brussels. Will Sisyphus roll the rock further or will the Greeks call the existential question for the EU???