Grexit. What are your views? What are your firm's views?

I for one think Grexit will happen, and we should already prepare for the worst.

However, what do you think and even more importantly, what does your firm think? People say it has been priced in...but has it? People say there are firewalls, but how do you really know your firewalls work in the massive CDS market? Will this be another Lehman?

It would also be helpful to get some derivatives people's viewpoints here, and also some European debt capital mkts viewpoints here.

  1. In plain English, how regulated is short-selling sovereign debt in Europe?
  2. Can someone explain to me how CDS affects bond yields? My guess is that if Greece exists, there would be a multitude of pressure on other EU nations:
    a) Spain/Portugal/Italy CDS spreads increase a lot, putting pressure on bond yields up (who is the largest insurance underwriter for this? aka, the AIG of European debt?).
    b) investors flee Spanish, Portuguese, Italian, Irish debt, again increasing pressure on their YTM. Conversely, German and American bonds get flooded and their YTM goes down (unless people sit on their cash).
    c) confidence in EU evaporate. There's now precedent for the Euro breakup
    d) the fragile southern EU nations can't refinance at lower rates and can't meet their interest payments. They might even taken people's deposits like Cyprus! Or people make a bank run. I for one believe that Spain, for example, can't handle that. They lack big, solid banks and rely more on local small banks called "cajas." These things are usually just city-wide banks, offer high deposit interest rates to get people, and while the government guarantee deposits to a degree, I doubt it has been tested and even so a lot of savings will get wiped out.
    e) then the ECB/IMF would have to step in again to lend money. Or else one after the other would HAVE to leave, go back to their own currencies, print money like Weimar Germany, but at least contain their mess at home. People in those countries with large savings in Euros will be furious if they are forced to convert back to their old currency since their currency values will keep on deflating after the initial conversion. They're going to want other assets, like gold.
    f) EU goes into recession. Euro goes down like a stone. Dollar and gold shoots up. Europe will now import a lot less from Asia because of recession and strong dollar (Asia is still quasi dollar fixed). Asian exports go down a lot. US corporations lose a lot of money due to FX despite currency hedges. US exports drop as well. Only plus side are European exports...but that benefits Germany more than the rest I think. But all in all, due to all this complexity, obviously the net sum will be negative in the short term.
    g) Fed will definitely not raise interest rates for long if Grexit happens. How can you have higher interest rates here in the US than EU long term? The dollar will shoot through the roof.
    h) Can we rely on BRICS to pull us out? I doubt it. China's slowing down and I don't know enough about their domestic consumption to comment. I don't know enough about India but I'd imagine they can't do things as fast as China due to the political process there. Brazil has its own mess at home.

I'm esp worried since I'm going to get my MBA soon and I don't want a repeat of 08/09. That was such a crappy recruiting year.

Also, I'm not recommending people to buy gold either. I know if Grexit happens gold should shoot up, but I don't know of any way to really value gold. Its worth whatever you think it is worth. The value is more mental than anything else. If you are comfortable with knowing when you buy into it and out, then please enlighten me.

 

I am also very interested in hearing the perspectives of derivatives people. I know for sure that if I were to put on a trade related to the greek exit, it would be hedged. Why do you think grexit will happen, if I may ask?

 

yes, but besides the immediate exposure, there could be speculation on the other parts of the EU, esp if the exit is disorderly and not properly communicated. Hopefully even if that happens will only be short term.

 

My personal opinion and my firms as well is that this is generally going to be a long drawn out kick the can/eleventh hour meetings ad nauseum and everything will work out in the end. With that said you're going to have a lot of vol. Germany doesnt want to be seen as the villain that allowed Greece to fail and thus they'll bend (as will Greece) to reach a compromise. Greece has nothing to gain by exiting the Eurozone and they also can't be kicked out by anyone.

 

I just realized the cajas were already consolidated then backed by the government or something...nvm...but I wonder how they'd defend against speculation, although being backed by the government helps a lot I assume.

 

I think Spain is fine, there's been massive consolidation from 60+ banks (most of them regional, the "cajas") to ~10 relevant banks, with the top5 easily having 70%+ of the market and a pretty large size (e.g. #1 SAN w/ eur 1.3tn). The B/S are mostly clean (the bad assets were transferred to the govt's bad bank or were covered with govt granted asset protection schemes) and the liabilities are getting repriced much faster than the assets (which is great in this environment) and many other positives. I don't think Greece is gonna negatively affect the banking system of any country in the Eurozone, it's a pretty irrelevant country.

 

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