By Gus Lubin Feb. 3, 2012, 9:19 AM
People are giving up on the Greek/Debtor deal and starting to whisper about structured default, according to UBS floor trader Art Cashin. Those whispers could get much louder ahead of Greece’s March 20 deadline to repay 14.5 billion euros in debt.
Beware The Ides Of March – Or Maybe A Few Days Later –
As a Greek/Debtor deal has been dangled before markets day after day for over three weeks, rumors of a different deal have begun to circulate. That rumor is of the EU finding a way to engineer a structured default of Greek debt, keep them in the Euro-zone and restructure Greek debt and finances in the post-default environment.
On March 20th, Greece is obliged to redeem 14.5 billon Euros in debt. Even after pulling all the coins out from under the sofa cushions, Greece is a bit short of this amount. How short? About 14.5 billion Euros short.
So, right now with an empty piggy bank and a calendar due date coming up fast, the Greeks are stuck pacing up and down in front of the EU offices with a bag reading “Friends help friends”.
But the giving friends, particularly the Germans, are reluctant to pour gold dust into a badly leaking container. The Greek economy is moving in reverse. The IMF says it shrank about 6% in 2011 and nearly the same amount in 2010. If things go really well, the IMF thinks the Greek may only shrink 5% in 2012. And, with the economy shrinking every day, even a static debt load means your debt to GDP keeps rising – the last thing a debt-holder wants to hear.
So, in the opinion of almost everyone, Greece can’t be saved – at least not in their current state. That leads to the growing speculation that, behind the scenes, the EU and the IMF are scrambling to find some way to structure a controlled, structured default.
No one is sure how you might structure it. You would not only need to cordon off the current Greek debt, you would probably need to cordon off the Greek banks also to prevent a contagion to the whole European banking system. You might even need a multi-day bank holiday to prevent folks from rushing to withdraw Euros and rush them to safety across borders in Switzerland or elsewhere.
No ready solution jumps off the page. It would potentially be fraught with risk and might threaten the whole financial system. But, if they could pull it off, it would be perfect. Kind of like a financial version of cold fusion. The calendar is ticking and inaction is suicidal. We think the rumors and speculation will continue. Try not to bite your nails.