Here’s a quick note on how the European rescue of Greece is probably going to unravel. Credit rating agencies continue to cut Greece’s debt rating because the bailout deals requirement for bondholders to write off debt is for all intents and purposes a default. It just can’t be called a default because the ISDA, owned by its member banks and hedge funds, isn’t going to call it that. Doing so would trigger CDS payouts that would render multiple counterparties insolvent and instantly freeze the European and American financial systems. Doing it the new European way means selective destruction of some creditor banks and hedge funds, country by country, in a way that allows the rest of the system to function. Trans-Atlantic financial elites remember AIG from 2008. They don’t want a repeat.
The problem with this method is that it requires PIIGS to implement austerity programs their populations won’t swallow. Greece will continue experiencing severe civil unrest as long as austerity policies sacrifice popular programs to preserve debt repayment. The alternative, of course, is to rip the bandage off quickly in the manner of Iceland. Greek citizens may accept that path, or they may just blindly follow radical parties promising an end to austerity and continuation of the unsustainable status quo.
I maintain that the most likely outcome for Greece is continued unrest, contraction of GDP induced by austerity that keeps debt-to-GDP unsustainably high, and an eventual inability to fund new debt in March. That will likely result in Greece being the first PIIGS nation to leave the euro. Some European and American banks will fail even if CDS limits are blithely ignored. The European and American policy classes will work overtime to triage failed banks and preserve select banks.
Full disclosure: No equity positions in European or American financial institutions at this time. No positions in European sovereign debt, ever.