Fast and Furious

The Greeks

The Ides of October are not to be undone in 2011.

The Greeks either have more money than previously admitted or less leverage with the IMF than thought with the IMF indicating that the Greeks should make do until November until the next $11 billion rolls in.

Private banks are unwilling to mark Greek bonds to market, trading at 41 cents on a the dollar, with the French insisting that the value is 79 cents on the dollar a number conjured by wishful reflection on what bank balance sheets can bear without collapse rather than selling 41’s.

Contemplate the plight of the 11 million Greeks of which 4.9 million appear to be employed. The government borrowed 81,000 euros per worker with no clear idea of what to do with the money except borrow more for precisely the same reason.

The government plan is for 30,000 of the employed, most over 60, to be offered retirement without pension so lenders can vacation in Cannes and the next $11 billion from the IMF can be recycled.

To wit the Greek government needs to borrow $5 billion a month to meet payroll (annual tax revenue of $100 billion against expenditure of $150 billion), principal and interest payments average another $6 billion a month, ergo the magical $11 billion.

The repayment schedule is not linear. The December 2011 principal and interest due is closer to $12 billion while in March 2012 the number runs to $17 billion.

It is not the next $11 billion that matters; it is whether the ECB can manage the next $100 billion plus Spain and Italy whose principal and interest payments in the next ten months exceed $400 billion.

Back to the French for a moment.

The French accounting fiction that the price of an asset in the market can be doubled for balance sheet purposes should be enough to downgrade the country to Zimbabwean ratings.

Morgan Stanley has the great good fortune of having the largest exposure to French Banks in an amount equal to 60% of its market capitalization and a bomb crater in its capital.

Insurance on Morgan Stanley’s debt is elevating but not as quickly as that in Dexia, 8.42% from 1.62%, a quintuple before leverage juice, a municipal finance specialist circling the drain.

The French and the Belgians have subsumed, nationalized, Dexia with valuations that can only be imagined in Chocolate and Bordeaux.

The concern is not Dexia’s dalliance but the implication of the exponential increase in value of CDS (credit default swap) contracts.

For every insured (buyer) there is a seller (masochist) that must either hedge the risk of default in proper quantities of selling short the targets stocks and bonds, properly pious prayer, or some combination thereof.

Greek bond holders are left with prayer because the bonds do not trade, the insurance is too expensive, and the exposure to great.

It appears that thirty four US federally insured banks have written $7.4 trillion in credit insurance with and without collateral not solely in Europe, though this should provide scant comfort because in the derivatives universe French banks may insure default on US municipal bonds with Morgan Stanley intermediating and, literally, being left holding the bag if buyer and seller collapse.

It is an educated guess that Morgan Stanley has sold more than its share of default insurance in many multiples of its market capitalization and book value.

An innocent question is which other financial suspects are similarly situated.

	greece		tx rev	tx spend	deficit	funding
	principal	interest
Sep-11	2,000	13	8,333	12,500	4,167	6,180
Oct-11	3,625	1,170	8,333	12,500	4,167	8,962
Nov-11	3,300	90	8,333	12,500	4,167	7,557
Dec-11	11,722	125	8,333	12,500	4,167	16,014
Jan-12	1,641	350	8,333	12,500	4,167	6,158
Feb-12	813	206	8,333	12,500	4,167	5,186
Mar-12	15,735	1,562	8,333	12,500	4,167	21,464
Apr-12	0	465	8,333	12,500	4,167	4,632
May-12	8,450	1,496	8,333	12,500	4,167	14,113
Jun-12	553	436	8,333	12,500	4,167	5,156
sum	47,839	5,913	83,333	125,000	41,667	95,419