I don't much believe in investing money in the casino, but I did short the Euro awhile back. It was just about the time in 2012, when Mario Draghi was dispensing some quite pointed investment advice:
The ECB’s Mr. Draghi said in 2012 “there is no going back to the lira or the drachma or to any other currency. It is pointless to bet against the euro. It is pointless to go short on the euro.”
Thanks, Mario. That was a no brainer!
But he's back at it again. On Saturday, Draghi said he would
“say exactly the same words today (and rejected) speculation that Greece may be forced to abandon the euro, reiterating that Europe’s single currency is irrevocable (and that) the euro 'cannot be reversed.'
Now that's downright foolish. Greece and the EU are pinned hard between a rock and a hard place. There is not a chance that Greece can service its monumental debt, yet the Eurozone politicians are now petrified by the fiscal trap they have concocted during their can-kicking rituals since 2010.
So the baleful facts bear repeating. The Eurozone governments have committed to $200 billion of direct fiscal guarantees to Greece, but in cobbling these expedients together during the 2010 and 2011 crises what the politicians of Brussels really did was to stick the ECB with the ultimate Old Maid's card.
Stated differently, in the process of bailing out their own banks, which were stuffed with Greek sovereign and private credits, Brussels did just enough to stabilize the private credit markets and ward off the vultures. This, in turn, allowed the ECB to pretend that Greek collateral was money good and to pacify the German monetary sticklers about the sin of monetizing state debt. At length, the ECB became the money market for the entire Greek economy.
As shown below, Greece owes the ECB through its various facilities including the ELA (emergency liquidity assistance) upwards of $140 billion. That is, the Greek state and banking system owes the ECB more money than the entire deposits of the Greek banking system!
Altogether then, Greece owes the politicians and apparatchiks who rule the continent from Brussels and Frankfurt the staggering sum of $340 billion. In fact, the sum is not staggering; it is lunacy itself. The cowardly, self-perpetuating rulers of the European superstate have managed to loan Greece what amounts to 3% of their own GDP when Greece itself only accounts for 2% of Eurozone economic output.
And here is where it gets especially tangled. Were Greece to default on its upcoming IMF payments and trigger a chain reaction of cross-defaults, the Euro system (ECB) would go into cardiac arrest. There is no plan anywhere to settle the $145 billion of liabilities that Greece owes on the various euro system accounts.
To be sure, most of those liabilities are secured by Greek paper. But, consider the fantasy world this so-called "collateral" actually represents. The "security" for an insane amount of ECB advances to Greece is actually mountains of completely impaired Greek government debt and loans to Greek businesses.
In the event of a blow-up and Grexit, exactly how would this mountain of collateral be collected? Would it be done by the German army sent in to occupy the Greek ports and railway stations? Or would the French army avoid dropping their never fired rifles as they entered the Greek factories to collect the yogurt machines?
No wonder Mario Draghi is so desperate that he is actually trying to impersonate Clint Eastwood. But if somebody's day is going to be made, it's not the Euro shorts. As another American cowboy, George W. Bush, said in a different context-----that is, the Lehman blow-off-----this sucker is going down.
As to timing---surely we are drifting hard upon the "any day now" condition. Indeed, as the world's most pathetic game of financial chicken plays out day by day in a flurry of head fakes and forked tongues, the planking is being laid for a grexit eruption that will be the Lehman event of this bubble cycle. It's all right there in plain sight------including today's edict from Athens seizing every dime of idle cash from every public sector entity in the land.
The facts on the ground are that the Syriza folks have raided every pot of cash available including pension funds, public service authorities, state operated hospitals and schools and even the accounts payable to virtually every contractor to the Greek state. Indeed, the only remaining option available to the Syriza government short of borrowing more money from its euro paymasters is seizing the citizenry's money from the $130 billion of bank deposits which remain (down from a peak of $250 billion).
But that's just a polite way of describing capital controls-----and the latter would be the end of the euro because they scream "redenomination risk". In short, if you have funds in an Italian or Spanish bank, the last place you want to be is stranded holding drastically discounted "euros" behind a wall of capital controls. Indeed, those would not be euros at all, but lira or peseta in monetary drag.
The only way out of this mortal threat to the Euro is for Brussels to take a deep haircut on the $200 billion of direct fiscal transfer commitments. But not a single Eurozone government could ever survive the resulting capital call. The Italian government would not last a nanosecond if it had to make good on some part of its $40 billion of bilateral and EFSF commitments, nor would France on its $45 billion or Germany on its $60 billion.
So the trapped politicians of the Eurozone will desperately look for word-splitting formulas and schemes to buy time, one week at a time. For instance, they might well release some of the remaining bailout funds to extend the game until June when the need for a follow on third bailout will become unavoidable.
In the interim, the situation is primed for an unexpected accident---the proverbial black swan. Indeed, one is now appearing that would make Lehman look like a Sunday school picnic. Namely, the rumored Russian advance of $3-5 billion for the gas pipeline scheme.
But if the Greeks were actually to receive the Russian cash, the wheels would truly come off the rails. As a matter of political perception if not literal payments mechanics, were the Russian advances to be used to fund the $1 billion of Greece's IMF payments coming due in the next several weeks, the money would effectively circulate right back to Russia by way of IMF bailout payments to the Ukraine, which, in turn, would use the funds to meet their Gazprom due bills.
Only people sipping Evian water in Washington's IMF conference rooms can not see the incendiary outcome of that scenario.
Actually, the same can be said for the incorrigible fast money speculators in the Wall Street casino. Apparently believing that the Greek subprime crisis has been "contained" they have once again slammed the VIX back into the sub-basement of the charts.
Alas, this time is different. We know exactly what comes next.