Preparing for Greece Exit......Known Event, Unknown Outcome !!

Preparing for Greece Exit......

KNOWN EVENT, UNKNOWN OUTCOME!!

This has been the most anticipated event since it first erupted in early 2010. However, Greece has been bailed out number of times due to adverse consequences of default.  Authorities these days typically make their intent known through media to see impact in the markets and then let the event happen, so that actual likely impact is known during rehearsal.  For eg impact of QE2 was largely discounted during rehearsal (when Bernanke started penning down this thought in editorials and during speech in Jackson hole in August 2010).

However, the outcome of Greece default has been massively feared but not known. Markets have inevitably sold-off every time on default rumours. This event has been so often discussed and debated that typical response would be that market has discounted this event (default), since its been more than year now. The repercussion of the event is likely to be more severe than event itself.  It will result in the view that bail out tendency which market is so used to wont be easily available.

We might very likely have relief rally post the event. Given the way DAX has fallen it indeed is discounting the event. But again issue would be repercussions of the event itself..relief rally could easily be followed by sharp slide. Given the nature of market of fooling more people all the time...we could very well have rally making people believe that event was indeed discounted and things are back to normal...but then something which was so feared for almost a year now and every time its rumour resulted in mkt sell-off...CAN IT END SO SMOOTHLY ???

Gold could very well have knee-jerk rise...but then GOLD has been discounting end of monetary system as we know.....!!

From Peter Tchir of TF Market Advisors

Is September 20 Greek Default Day?

If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day.

Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro.  So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.  The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment?

The Fed Scheduled their meeting for 2 days.  It now starts on September 20th.  Maybe a co-incidence, but what better way to be prepared for new emergency policies?

CDS "rolls" on the 20th.  On the 21st, all Sept 2011 CDS will have expired.  My guess is that banks own more protection than they sold to the September 20th date, so defaulting while those contracts are still valid would be a net benefit to the banking system.  As a whole, triggering CDS will likely benefit banks as I can find banks that say they own protection against positions, but find more hedge funds are uninvolved or have sold protection to fund shorts in other sovereigns.

We just finished the big finance minister meeting.  They can all return home, brief their staff and be prepared for Tuesday.  Prior to D-Day there were lots of last minute preparations to make sure everyone was on the same page and as prepared as possible.  Why not before GD-Day?

Papandreou cancelled a trip to the U.S. And Venizelos mentioned that Papandreou had to be in Athens for "Initiatives".  If you ever wanted some hand holding from your leader, it would be at a time of default.  He would have to be in country to calm things and mention all the deals he put in place last week on the conference call.

None of the headlines from Poland or comments from the IMF seem particularly positive.  I can't even find the customary all is good, we are working together, this was a time of great progress, boiler plate statement having been released.  Maybe they are waiting for Monday to let the world in on all the joyous progress.  I suspect they are more likely to wait on bad news than good news.  They have often tried to control bad news over the weekend.  Maybe they have decided it would be better to deal with it real time.

There is still a chance we see some bold new initiative or plan, but as I wrote last week, every step and virtually every comment made, for the past 8 days, is consistent with preparing for a default.

Media Alerts in last few days

SOROS: We Need "Unthinkable" Measures To Save Europe (http://articles.businessinsider.com/2011-09-15/markets/30158873_1_euro-crisis-greek-bank-common-currency)

Date – 15 Sep 2011

Time for a Smaller and Stronger Eurozone - Mohamed A. El-ErianCEO and co-CIO, PIMCO

(http://www.huffingtonpost.com/mohamed-a-elerian/time-for-a-smaller-and-stronger-eurozone_b_967870.html)

Date – 17th Sep 2011

After Geithner Strikes Out In Poland, Papandreou Cancels U.S. Trip And Hurries To Greece(http://www.businessinsider.com/papandreou-cancel-geithner-poland-2011-9)