So Greek sovereign debt is now junk. Which means they not only can’t borrow on the markets, but also can’t now borrow from the ECB. EBC won’t accept junk bonds. So with the Greek National bank unable to borrow, Greece’s banking and financial sector is also unable to borrow. Which is at least part of why Greek financial stocks fell by 17% TODAY. Just today. Tomorrow, unless there is a major announcement of immediate cash/guarantees, will be more of the same. Greek banks are cooked.
Greece’s banks won’t lend to each other – no repo market in Greece for months. They can’t borrow at any rate that they can afford and their central bank is broke. So it’s all under control and no chance of contagion.
Anyone remember when Bernanke said, more than once, that ‘sub-prime was contained’?
Greece needs cash NOW. If there isn’t a bank run in the next few days I’ll be amazed. But then again I am often amazed.
Greece needs Germany, in particular, to fork out now. And time is against them. While the Greek’s need action yesterday, the German’s actually have to have a bill passed to allow them to bail Greece out.
By the way – the Titlos currency CDS I have written about and got wrong. Well I think, having read a lot more about the labyrinthine complications of the Titlos deal ( A front company in London doing a deal housed in Ireland involving both the Greek Central bank and the National Bank of Greece which is an ordinary bank – whose shares dropped like a stone today) – I think this deal should have now blown up in the Greek’s faces and they may now be hearing from Goldman or whoever now owns the other end of the deal, for collateral to be posted. Just to add to their woes.
I think debt restructuring must now be a very real possibility. The bond market itself certainly thinks so. Who hedged and who didn’t? Is going to wake up a lot poorer (Commerz bank and Soc Gen to lose, Deutsche to reap CDS rewards. ) And over in stocks, volatility indexes are shooting up. So bond troubles are creating stock market turbulence. And turbulence, as any mathematician will tell you is unpredictable and dangerous stuff to mess with.
And this, I think, is the crux. Markets NEVER, EVER, seem to grasp the nature of their own non-linearity.
Things, almost all interesting and complex things are non-linear. They don’t progress in a smooth way where the next step is much like the last one and continues a trend up or down in a predictable fashion. In linear systems the past predicts the future. Because the future is always a more or less smooth continuation of the past. Even changes of direction are smooth and step wise. In the non-linear world none of this holds true. Change is abrupt, out of the blue and goes in lurches, bumps, drops and U-turns.
So Portugal is bobbing along but suddenly, today, she gets a two notch down-grade of her sovereign debt. Two notches to the last and bottom rung of the A range. Next drop is into B territory.
Not only was Portugal downgraded but there was suddenly a significant spike in worry over Spanish debts, Irish and Italian.
Worries about all of them are to do with their reliance on borrowing when borrowing seems to be getting harder to come by. Yesterday bond markets were liquid and flush. Today the worry takes hold that they may start to contract. Suddenly the bond market and those who watch it, see what they saw one way yesterday in a very different light today.
Italy has been seen as doing amazingly well so far. Until now no one seemed to think it worth worrying over why and how. Suddenly their last bond auction only barely got enough bids to sell the debt on offer. That in itself caused people who had not worried to start asking are, ‘Can Italy really be this well off? Might there be liabilities they are hiding?’
Suddenly people are feeling that maybe the bond market isn’t bottomless. Maybe debt will be harder to find, buyers more scarce and less willing to take risks. If so then countries like Portugal, Ireland and Italy might find themselves competing for buyers. This means not only countries in debt, like Ireland and Greece, but those, like Portugal, with less debt but with low growth prospects who were therefore thinking to borrow their way along, will all start to feel the heat.
All this sudden surfacing of worry itself breeds worry.
What I am getting at is that we might be at one of those moments when rather suddenly what everyone saw as reassuringly half full seems to be worryingly half empty. Markets are always taken by surprise by such moments.