The Absolute Return Letter - Greece: What Happens Next?

Friday, Jul 08 2011 by
The Absolute Return Letter  Greece What Happens Next

“Anyone who isn’t confused really doesn’t understand the situation.”

Edward R. Murrow, Broadcaster

I can already hear the collective sigh - oh no, not another letter on Greece! The battle fatigue is evident. We are all exhausted from years of fighting the crisis but, at the same time, we are fast approaching the end of the road, at least as far as Greece is concerned, for one simple reason. Policy makers are running out of options, verified by their increasingly desperate reactions to undesirable news.

One recent example: Earlier this week Moody’s downgraded Portugal (in my opinion deservedly so). Governments across Europe, who in the past have been highly critical of the rating agencies for being behind the curve, suddenly criticised Moody’s for undermining their work. Long live hypocrisy.

No, this letter is about what is likely to happen after Greece has defaulted, which is where I am increasingly focused. The can may be kicked further down the road in order to buy additional time, and every trick in the book may be used to portray the default as a benign event (note, for example, the use of the word ‘rollover’ rather than the somewhat less pleasant ‘restructuring’ in the latest proposal), but default it will.

Chart 1:  Flight to Safety in Greece and Ireland


Source: JP Morgan, Gavyn Davies on

Greece is now a side show         

 The reality is that Greece is increasingly becoming a sideshow. Much of the media may not have realised this yet (with a few honourable exceptions, they are still obsessed with Greece), but most investors certainly have. Following the downgrade of Portugal earlier this week, Portuguese, Irish, Spanish and Italian credit default swaps (CDS) all widened substantially. And out there, in the real economy, it is not only Greek savers who have come to realise that this is going to end in tears. Irish retail bank deposits have dropped approximately 15% since early 2010 (see chart 1).

In fact, the situation is now so bad that the ECB is financing about €400 billion of banks’ balance sheets in the crisis countries (see Gavin Davies’ blog in the FT here). Given that the combined capital and reserves of the European System of Central Banks is only about €81 billion, the ECB is increasingly at risk of being bankrupted.

This raises a myriad of…

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This material has been prepared by Absolute Return Partners LLP ("ARP"). ARP is authorised and regulated by the Financial Services Authority. It is provided for information purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. Information and opinions presented in this material have been obtained or derived from sources believed by ARP to be reliable, but ARP makes no representation as to their accuracy or completeness. ARP accepts no liability for any loss arising from the use of this material. The results referred to in this document are not a guide to the future performance of ARP. The value of investments can go down as well as up and the implementation of the approach described does not guarantee positive performance. Any reference to potential asset allocation and potential returns do not represent and should not be interpreted as projections.

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4 Comments on this Article show/hide all

alano20 9th Jul '11 1 of 4

Unfortunately the links in the text, e.g. I suggest you read this link for a well balanced analysis of Italy’s predicament don't work either in Firefox or Google Chrome.

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marben100 9th Jul '11 2 of 4

What Europe needs to do instead is to create a new currency built around Germany and based on a fiscal union from day one. As Germany will effectively be underwriting such a currency, it shall have the right to choose who it wants in the club.

...which effectively means Germany ruling the other "neurozone" countries. That sounds like a politically acceptable solution - not!

I agree that a break-up of the eurozone is highly likely, sooner or later - but not in that way. As you point out, the current situation is unsustainable and several countries are effectively bankrupt and must default eventually. More likely that the less fiscally strong countries are simply forced out and the Euro reverts to a core group.

CDSs on sovereign debt seem like an intrinsically silly idea to me. Realistically, how can banks bail out creditors of whole countries if the country itself is forced into default? Such instruments seem like the same sort of smoke-and-mirrors hokum that helped lead us into the subprime crisis. Anyone buying sovereign bonds must consider the risk of that sovereign defaulting, make their own judgement of the amount of exposure they can afford or want in the light of that risk, and accept the risk themselves. Then you have a proper market. Otherwise you have a situation where those that can't see the wood for the trees grossly underestimate the risk they are taking on, not realising that their insurance isn't worth the paper its written on, take on excessive risk and undercharge for that level of risk: a false market.

"Subprime countries" like Greece and Italy, with poor track records for fiscal discipline, should not expect to be able to borrow cheaply or in large amounts.


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JPGH 9th Jul '11 3 of 4

With regard to Greece, AIUI based on what I have observed/read on newspapers/TV and also from conversations with various Greek Expats working here in UK, the bulk of its indiginous Greek population either evades or dodges some/all income tax.
Also AIUI there is the issue of huge payroll burden of the annual additional monthly salary cheques or holiday money (a 13th & 14th month's salary paid in July and again at Christams for each 12 month calandar year).
AIUI these additiional payments count also towards years of service when estimating retirement age and for state pension final salary entitlements. So theoretically if you have 35 years actual work service/contributions then with these additional annual 2 months extra payments you have almost 41 years of pensionable service so if you stateted work in mid 20's (tyical age of professional Greek classes after Uni/national service) you could/can easily retire in your mid 50's with a full government backed gold plated pension linked to your final salary (of 14 monthly cheques!!).

If just these above issues were addressed then tax receipts would be up significantly (by as much as 100-200%) and erasing the ingrained culture of these 2 additional monthly payments would ensure population contiues working until pensionable age i.e. 60-65 thereby reducing the State outgoings paid to early pensioners and payroll burden on State and private employers then Greece can surely start to pay down it's external debts very quickly.

Granted this is a simplistic/idealistic view but surely even the indiginous Greek population can see that these measures are probably the easier of the choices facing their country.


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ohisay 4th Oct '11 4 of 4

What a colossal and tragic failure of the whole Greek political system over the past twenty years.

However economically and perhaps morally justified (on the basis of a completely non functioning tax collection system ) can anybody seriously think this latest package is actually going to work?




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About Niels Jensen

Niels Jensen

Niels Clemen Jensen has nearly 30 years of investment banking and investment management experience. He began his career in Copenhagen in 1984 before moving to Sherson Lehman in London in 1986. In 1989 he joined Goldman Sachs and became co-head of its U.S. equity business in Europe in 1992, a post he held until 1996, when he joined Oppenheimer to manage its European business. In 1999 he re-joined Lehman Brothers, now in charge of European Wealth Management. In 2006 he was appointed Director of Trafalgar House Trustees Limited, advising one of the UK's leading corporate pension funds on its investment strategy. Niels founded Absolute Return Partners in 2002 and is its Managing Partner. He is a graduate of University of Copenhagen with a Masters Degree in economics. more »

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