Fools to the left of me, Jokers to the right.. Ah...this must be Yoorp!

Newedge – Blain’s Morning Porridge – November 2 2011

By Bill Blain, senior director, special situations, Newedge (as seen on TV)

T: +44 207 676 8615; Mobile: +44 777 088 1033;

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(Readers of a nervous disposition are warned; I might use a few wee swear words this morning...) Markets opening to a welter of rumours. You know someone is desperately trying to talk market higher when the “China to invest 7 bln in EFSF” card is played.. heard it before.. !

7 bln what? Drachma? And Greek government is apparently on the edge of collapse – really? For a small economically insignificant country, the Greeks are causing undue amounts of angst. On the other hand, it was educational to watch Europe's essentially unelected elites react in the face of democratic challenge - they were not happy. Yesterday referendum news tuned into a risk-off rout.

You can argue whether its SNAFU or FUBAR, but with so much 'political news flow' expected in coming days: Fed today, ECB tomorrow (time was when they were both pure market), Papandreou facing defenestration in Cannes today, and G20 meeting tomorrow.. there doesn’t appear to be much upside potential.

Friday will be US jobs, and winter is coming. Yet, this morning markets seem to be talking themselves higher. Why? Damned if I know.

Whether the Greek government falls and we get election rather than referendum, whether the unexpected referendum result was a desperate attempt to polyfill the fractured Greek ruling party ahead of a likely lost austerity vote on Friday, whether Papandreou believes he can terrify the bubbles into accepting austerity as the preferable evil to exiting the euro, or whether the sudden changes announced in the leadership of Greek armed forces (in the Torygraph this morning) are indicative of a potential coup - who knows?

For markets, it’s yet another case of get on with it - play the volatility and look for the opportunities. In. Out. In. Out. Shake it all about.. But, markets are getting tired of the rollercoaster.

One client yesterday summed it up rather well: "The Greeks should just get on with it, and default - no haircuts, PSI whatever other *bleep* *bleep* *bleep* is being peddled this week as a full and final solution. Then they have a choice to stay in the euro and agree to whatever terms are dictated to them, or they go with the new drachma and see where that gets them. The EU can then concentrate on saving those countries that have a fighting chance of survival."

Which brings us back to the “where the **** are we” question? Let’s assume the Greek crisis deepens. As the EU can't (yet…) solve domestic politics, it has to focus on firming up contagion defences: i) bank losses (the recapitalisation plan); ii) easy money provision (the ECB prepared to lend more money to banks in a liquidity crisis); and iii) most importantly ensuring the survivable countries can be defended by a functioning bailout plan - which means sorting out the EFSF immediately.

Unfortunately, as it stands the EFSF is a complete and utter cluster****. I apologise for being crude, but it’s become an appalling mishmash of half-backed compromises designed to not upset the Germans rather than bolster sovereign funding access. If something looks, smells and feels like a CDO cubed, then don't be surprised if it performs like one. The market perceives it to be primarily symbolic rather than effective - based on the complacency of the Euro Elites to think they can simply talk the market into believing every thing's alright.

(Perhaps the timing was coincidence, but funny how Ireland found a missing €3.6bn in the national accounts y’day, just as the EFSF struggles to sell a new 10-yr bond to finance the next Irish bailout tranche. Serendipity?)

No-one expects the current EFSF negotiations are going to result in a thoroughbred solution to the crisis. As I've said before, a horse designed by a committee is a camel. All this talk of levering the EFSF will not result in a robust, fit for purpose fund to shore up Italy and Spain!

Nope...instead the market has been shorting the EFSF as one of the most obvious trades around. And the need for an EFSF in the guise of a sovereign TARP-equivalent is more pressing than ever. We are about to see Italy cross the event horizon into the death spiral as yields spike over 6.5% and margin calls are hiked.

Spain, despite best efforts, is not far behind. Belgium has joined the queue. What we need now is an immediate robust and 'fit for purpose' EFSF backed by far more aggressive and meaningful action, like unlimited access to the ECB's printing presses, and full joint and several European guarantees - which means Germany ultimately pays if it fails.

But at least it would have a chance of working. Europe can sort out fiscal responsibility rules afterwards. This morning we hear Italy is trying to persuade banks to sell back short-term BTPs in exchange for long-dated ones – an attempt to address next year’s massive funding crunch! Meanwhile…bunds rally.

Back in the real world.

* A common theme in research is markets are being held hostage by the Greek/euro crisis. With signs the US is getting onto the runway for economic takeoff - albeit a very low angle of climb, perhaps it's time to start going overweight potential winners? Slow growth investment profiles?

* Bloomberg survey says 42% of respondents say fewer countries will use the euro in five years time.

* ISDA decision to declare the PSI Greek haircuts as 'voluntary' comes in for some stick from High Frequency's Weinberg: “The notion that any bank would voluntarily accept a write down of half on any asset is particularly silly...If a write down is accepted by a creditor because the only alternative is a default by the borrower, then that write down is indeed involuntary and it constitutes a credit event.”

Weinberg added: “the rules have, in our view, been bent to fit the will of the politicians.”

What next we wonder…out of time..