Greece ‐ the bailout plan for the bailout

The bailout plan for the bailout of Greece just made things even more complicated and on several levels:

The preconditions:
1. Yes, Greece got its second financing programme but it is conditional on several factors:
1.1 Compliance with outstanding issues in the Fifth Review by the Troika before the end of February.
1.2 Priority given to debt servicing in the new programme which means Greece needs to approve legislation
concerning this and soon.
1.2.1 EU Commission and Troika will increase their presence in Athens to: "help Greece with their "institutional
governance"" ‐ i.e: Greece is now fully under control by the EU (read: Germany) ‐ and this could have a major
impact on social tension there from today onwards.
1.3 PSI approval of 95 percent ‐ defined in the sustainability analysis by the International Monetary Fund ‐
considering the worsening of the haircut to 53.5 percent from 50.0 percent and a lower coupon (2 percent for
2012‐15, 3 percent for 2015‐2020, and 4.3 percent for 2020‐2042) ‐ the chances are decreasing for a voluntary
deal.
1.3.1 Greece has already submitted to parliament a draft bill introducing Collective Action Clauses (CAC) to Greek
government bonds. This indicates it does not expect 95 percent approval from PSI investors to be achieved.
1.3.1.1 If 95 percent approval fails (by March 8 deadline) ‐ then Greece will enforce an involuntary deal and
consequently create a "credit event" ‐ which at last count included gross payments of 100 billion from credit
default swaps.
1.4 IMF commitment still unclear. The International Monetary Fund's Lagarde voiced support but also pointed out
this is a matter for the full IMF board. An IMF and G‐20 meeting is scheduled for February 24‐26 in Mexico.
1.4.1 The IMF has already said it will only help if the EU agrees to let the European Financial Stability Facility and
the European Stability Mechanism run in parallel in order to make enough funds available to function as a
firewall.
1.5 ESM / EFSF ‐ all together now or separate. The issue here is a parallel funded ESM will need additonal funding
contributions. To reach the "magic" EUR 500 bln an extra EUR 250 bln is required. This will mean higher
contributions from members, yet again! Imagine the opinions in Germany, Holland and Finland when this
becomes a political reality: Germany on its own will have to pony up an additional EUR 80‐90 bln.

The deadline here is the March 1‐2 EU Summit. Expect Germany to again take a last day last minute approach. But
this could be deal breaker as the German Parliament over and over again has said: EUR 221 bln is its maximum.
This will be interesting to follow.

The economic reality is different from hope and prayer
Having dealt with a few of the preconditions let's move on to the political‐ and economic reality.
Despite improving survey data for Europe the one indicator which really could help: Lower Unemployment
continues to disappoint. We are seeing new highs in most of Europe. Greece, Portugal and Spain all recorded new
highs in recent months. This represents the little talked about negative visious circle these countries are actually
caught in: Increased "fiscal compact" austerity decreases growth, lower growth increases unemployment, higher
unemployment decreases tax revenue, growth and sentiment.
In economist speak this represents 'fiscal multipliers' ‐ i.e: for x pct of austerity (or stimulus) how much growth
will a country lose(give).
Smarter people than I generally use 0.5/0.75 x for G‐20 countries (1 percent austerity costs 0.5 percent in growth
@ 0.5x) and 1.0 for Emerging Markets.

It could be argued that in the case of Greece things are worse; the translation of all the austerity forced upon
Greece will have more than a 1‐for‐1 impact.
The real risk and what will ultimately take Greece down the final path to bankruptcy is most likely a worsening of
the country's economic situation rather than a lack of political will to continue this massive monetary experiment
of printing money. The German fiscal compact will worsen things even more and open talk about Greece
potentially voluntarily taking on a bankruptcy board by the German Finance minister is a clear sign we are
entering the 9th innings in baseball terms.

Monetary printing run amoc
I need here to comment on the extreme balance expansion by major central banks as most commentators use
it as the reason for delaying the end game.
The chart below is from Credit Sussie using Thomson Reuters Database charting G3+ central banks' balance
sheets since 2007. A mere 8‐9 trillion US dollars has been added. Do not lose sight of this. The improvement
you feel when looking at your stocks is based on this. It does not change dynamics, but it makes people feel
better despite the social and disposable income cost. (Debasing directly and lack of purchasing power.)
Keynes was right about one thing at least: "There is no such thing as a free lunch"

Conclusion
The market thinks we are now well into 2013 before things gets worse ‐ I doubt it. The amount of "new money"
needed to keep the ever rising balance sheets of central banks expanding is just too big.
The geopolitical risk ‐ the exogenous shock is around the corner if not in the Middle East then in rising commodity
prices ‐ and in terms of fundamentals ‐ well yes things are better than expected but not overall. Our indicators for
US, Asia and Europe are either off their peaks or turning down already indicating this was it. Next is the major
mean reversion which always happens between end of Q1 and Q3 (the next low).