Please sir, can I have some more…

Mint – Bill Blain’s Morning Porridge  November 27 2012

Greece gets a new fudged bailout. Joy unconfined and bunds down. The consequences if Europe hadn’t been able to agree this latest whoosh deal were just too horrendous to contemplate – Spain, Italy and the rest would have been trashed and the long Draghi summer rally would probably have been unwound. Last night’s deal stays just this side of legal by not granting any new money to Greece, or causing any write-offs for public institutional holders of Greek debt. Fact private investors have already been slayed seems somewhat inconsequential.

But the process highlights the ongoing dangers in Europe. This deal only just got done by stretching the rules to breaking point. EU, National Politicians and the IMF all pressing different agendas… it’s a wonder a solution was found. If the stresses and tensions of calming Europe’s least consequential economy (well, OK, Cyprus is even less important) nearly broke it.. then how is Europe going to cope when one of the important countries starts to fail its bailout tests and asks for more..?

Don’t believe this crisis is over yet.

And how should investors in Greek paper react? Let’s see the proposed terms of the buyback. I’m tempted to suggest holders should not blindly accept buyback terms. Nope. Last night demonstrates Europe will fudge anything to keep the Greek illusion current, so perhaps the right play is to prepare to holdout for a higher buyback price. Yep.. why not arbitrage Europe’s curious mess of committee led decisions..

On the other hand.. we very much doubt Greece is solved long-term. The IMF made clear it ain’t lending till it gets more proof the cuts are working, and I’m 100% confident we will be talking about yet another Greek fudge 6-8 months down the line. I saw a prediction on BBerg this morning saying Greek holders will be haircut again in a few years!

Which brings us to a second trade idea for today: play the short-term uptick of Greece being out the spotlight for a while. Buy very short-dated Greek Govt guaranteed utility names. We’ve got a very attractive 5 month bond yielding 90%. The name is explicitly guaranteed, so if it doesn’t pay, then Greece defaults and what a can of worms that would be. Very happy to talk to anyone wanting more info on the trade!

Lots of comments back yesterday on my rant y’day about banks, over-regulation and picking the sound names. More than one reader highlighted fact Lloyds bank just sold its Irish commercial loan book to a hedge fund at 10%! The name of the game in coming months is going to be “Capital Arbitrage”, ahah… just like the old days..

Good number of readers suggest the European Banking Association is likely to “blink” about enforcing stricter Basel III capital terms, as more and more banking “speed-bumps” emerge and the crisis shows no sign of ending. Others pointed out Goldman Sachs turning down roles on recent rights deals as too risky and fees being too skinny. On the other hand, a number of readers believe there is still plenty of upside potential in bank paper – so if you think this rally played out.. we still have buyers! 

 

Let’s do a little compare and contrast. Since 2008 the UK has contracted by 15% in dollar terms. Canada is up 20%. The big Canadian commercial banks have seen significant loan growth and are now considered leading global players. UK banks… got big targets painted on their foreheads.

So my own disappointment at being turned over for the Bank of England job aside, the choice of Canadian Central Banker Mark Carney is fascinating and possibly inspired. (Let’s be blunt.. what chance did I really stand for the BOE job without Goldman Sachs on my CV?)

Will a new independent broom turn around UK banking? At a time when the UK is struggling to maintain the prestige and position of the City of London in the face of Anglophobes across Europe and the US, it was critical to bring in a new Bank governor with true global stature rather than simply promoting competent technocrats or regulators.

Carney’s tasks will be legion: not just establishing the bank as lead UK regulator and pressing the UK’s case in the increasingly complex global regulatory scene, but also re-energising the Bank of England through cultural change. The fusty years of an academia minded Bank described as “akin to the Sun-King’s court” will need to be swiftly repaired and made to work in the 2010s rather than 1910.

Carney’s first and major job is to change the Culture of The Bank.. (Some say there is more culture in a pot of yoghurt, but that’s a whole other story… ) The only thing that hurts about Carney’s appointment is that UK Chancellor Geroge Osborne seems to be getting the credit for it. Didn’t his smug little smiley face on brek-drek make you want to kick the TV? 

And finally… “Anti-fragile” – Nassim Taleb’s new book on “How to Live in a World We Don’t Understand” is interesting for its central concept: Folk and institutions are much more resilient and can been more so in times of stress. Look at how much the Eurozone has bent, bowed and fluttered through the crisis but hasn’t utterly fractured. Taleb calls this “anti-fragile”! He suggests a number of ways to address it – notably refuse advice from anyone not taking personal risk! Keep institutions small and contained. Constrain complexity, etc etc.

Now I ain’t going to claim I’ve read it.. can’t stand self-help psycho-babble, but Gillian Tett’s review in FT conveys the gist if you want to learn more..

Out of time!

BB

0207 786 3877

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