On 2/23 we penned a note titled “Duration Mismatch: Greece” in which we said that the big moves “associated with a scenario in which Greece defaults on its sovereign debt are behind us, for now.”
While the data has changed since that note, it has changed in the direction we expected it to. Not only are we getting confirmation from trending lower-highs in Greek CDS and the 10-year Greek bond yields, and higher-lows in Greek stocks (see Athex Composite in chart below) but today’s decision by the government to approve spending cuts and revenue generating measures is bullish in relation to the “action” the EU was looking for ahead of PM Papandreou’s visit to Germany, France and the US beginning this Friday.
Today the Greek government announcement 4.8 Billion EUR of deficit cuts, including:
(1.) ~2.4 Billion EUR in spending cuts
(2.) 2% gain in VAT to 21%
(3.) Higher tax on alcohol and tobacco, in particular
The proposal above has been estimated to trim its current budget deficit of 12.7% of GDP by 2%, or about half of the 4% in cuts the government set for this year.
While this action is a first step in Greece cleaning up its own “house”, we wouldn’t rule out the future intervention from states like Germany and France, or the larger European community, due to the significant bumps that remain in the road ahead, including some 20 Billion EUR of Greek bills and notes due in April and May of this year.
While the Greek government has announced it will issue 5 Billion EUR of bonds “when conditions are right for Greece” to foot near-term obligations, demand for this issuance is still largely uncertain and serious volatility could be seen ahead.
Every macro risk has a time and a price. Beware of consensus leanings. Sometimes they are lagging indicators. AFTER a stiff 3-week short squeeze in European stock markets is the time to start asking yourself whether you should be making short sales, not AS the manic media clamors for attention.