Greek PSI Is NOT Getting Done

Positions in Europe: Short EUR/USD (FXE); Short France (EWQ)


…or at least not anytime soon, like in the next day or two. 


Expectations are high, and as the calendar of events below shows, there’s much in the way of a quick sign-off on the PSI. While we ultimately think that some deal will get done, the artificial deadlines will continue to be ignored along the way as multiple parties must be in agreement. Ultimately, the final deadline on PSI must be Greece’s €14.5B debt maturity coming due on March 20th. We think Eurocrats will continue to push out the calendar, and ultimately decide on some 11thhour compromise.  However, expect the goal posts from the relevant parties involved to change in between time, which will continue to influence the EUR/USD.  Again, Eurocrats are suspending reality, which makes us concerned about taking any absolute directional macro bets on the region.


That said, Keith shorted France via the etf EWQ today in the Hedgeye Virtual Portfolio, and he re-shorted the EUR/USD (FXE). Below we provided updated levels on the EUR/USD and France’s CAC, and explain our concerns around France’s growth prospects and fiscal outlook.



The Road to a PSI Deal:

-Unsubstantiated reports continue to swirl and the road to agreement is convoluted with numerous parties that must come to agreement. What’s involved is 1.) the PSI, the terms of which are rumored to include a swap for 30YR bonds with a coupon as low as 3.6% (or approximately a 70% loss), intended to reduce €100B off more than €200B of privately held Greek debt, and 2.) pursuant to the passage of the PSI, further fiscal consolidation measures, including a cut in the minimum wage, lower pensions, and immediate layoffs for as many as 15,000 state employees to put in motion approval for Greece’s second bailout package of €130B+.


Here’s the latest:


1.  Papademos met with the Troika until 4am this morning and reports indicate that the Greek party leaders have now received their draft document on a loan deal and are reviewing it. Private sector wage and pension cuts appear to remain the key obstacle to gaining support.


2.   According to the WSJ, the ECB may now make concessions by exchanging its Greek bonds with the EFSF at below face value if debt restructuring talks are successful, to contribute an estimated € 11B to overall debt reduction. Hedgeye Counter:  up until now the ECB (Draghi) has vehemently stated that it will not participate in the PSI. The logic didn’t make total sense, but the take away is that the ECB did not want to take a loss on its holdings.  Is the ECB really shifting its stance?


3.   The leaders will meet around 1pm local time (6am EST) today to discuss and then sit down with Papademos at 3pm (8am EST). 


4.  If they can get everyone on board, they can present the plan to the Eurogroup Finance Ministers by the end of the week and Greece’s Parliament can potentially vote on it this Sunday


5.   An unconfirmed source says that a formal offer for the debt swap must be made by February 13th to allow all procedures to be completed before the March 20th €14.5B bond comes due.


6.   However, even if points 1-4 get a mutual agreement, German lawmakers in particular (and perhaps legislative bodies of other Eurozone countries as well), may well veto it across:

  • The exchange of ECB’s Greek bonds with the EFSF
  • The PSI terms
  • The second Greek bailout package terms

Given, we think the timeline will be pushed out, especially pursuant to how many national parliaments decide to take these measures to vote.



Shorting France (EWQ):

Today Keith shorted France via the eft EWQ in the Hedgeye Virtual Portfolio. From a long-term TAIL perspective, the French stock market remains bearish. We've waited and we've watched - Greece is not our catalyst—French growth and an expanding public debt (as a % of GDP) are. We think growth will undershoot estimates of 0.0% this year as Sarkozy or the future candidate (based on presidential elections in April-May) struggle to push through budget cuts needed to trim the deficit by 1.4% to put it on target to reach 3% in 2013. Further, we see its debt, which may expand to 90% (of GDP) as a structural impairment to growth, a level that has been proven by economist Reinhart and Rogoff in their seminal book “This Time is Different”


Greek PSI Is NOT Getting Done - a. CAC


Re-Shorting the EUR/USD (FXE):

Keith re-shorted the EUR/USD pair that it is finally immediate-term TRADE overbought with intermediate-term TREND resistance overhead at $1.34. Given the vast uncertainty surrounding the Greek PSI and the country’s second bailout package, we’d expect more downside in the cross as Eurocrats fumble with an agreement.


Greek PSI Is NOT Getting Done - a. EUR


Matthew Hedrick

Senior Analyst

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