What Will Happen in Greece, Spain, and the EU?
Posted by Larry Doyle on May 22, 2012 5:47 AM |
I love listening to and reading the thoughts of well informed financial pros.
All eyes and ears are justifiably tuned in to developments in Greece, Spain, and throughout the EU. Will Greece leave the EU and precipitate runs on the bank in other European nations? Let’s navigate and get the insights from industry insider, Michael Platt of Bluecrest Capital Management.
Platt has received significant attention in the marketplace recently as one of the traders on the other side of JP Morgan’s losing credit bet. Having ‘harpooned’ JP Morgan’s London whale, Platt offers a wealth of valued perspectives on developments in Europe and on the situation at JP Morgan. He was interviewed recently on Bloomberg.
On Europe’s crisis and whether the euro is a failed experiment:
“I think we need to look at the situation country by country. If you take the situation of Greece, in the opinion of the markets, Greece should have should never have been allowed into the euro in the first place. They have already defaulted on their debts. They nearly defaulted again on a whole currency bond last week. They are not in a position to pay their bills. They have a primary deficit still. They will continue to be excluded from the funding markets. I think at this point in time, as the market increasingly calls into credibility the Troika, they are continuing to put money into a situation which has clearly become hopeless. “
On why the Troika continues to put money in:
“Greece will never give it back. We’re got some pretty clear evidence that this is the case. They are not in a position to pay the money back. The situation in Greece has gone from mainstream politics to now communism being the likely dominant party at the next round. The communist party has promised chocolate cake with no calories to the population – they can stay in the euro but abandon the program of austerity, which will not be the case. The market now is openly speculating that Greece will exit the euro. “
On when Greece will exit the euro:
“I think it revolves around what happens to the Greek banks. We have seeing a gradual movement of money out of Greek banks. The deposit base has reduced from about 240 billion euros to 140 billion euros. We saw the pace of that stepping up recently. The big worry would be a stampede out of Greek banks, which precipitates an earlier crisis while the country has no government. That could move that way. If we go to a world where there’s an election and Switzer gets a 30% share in the votes, and then forms a coalition, I think they will leave almost immediately. “
On the total financial impact of a Greek exit:
“I think the order of events would be Greece exits, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro because of distresses in their own banking system, and then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe. “
On what a swift and orderly solution would look like:
“Let’s look at the problem. In Spain at the moment, the estimate of the amount of money required to take Spanish banks to a proper 10% tier 1 capital ratio is around 90 billion euros. There is no effective federal deposit insurance scheme in Spain. It used to be eight billion euros, now it’s at 300 million euros. It has forward losses of between 15 and 20 billion euros as a result of two caja deals. So the risk is that people focus on the Spanish banking sector and we witness strong outflows or runs out of Spanish banks.”
On whether Spanish banks are acknowledging their real estate positions:
“No, they are not. In a country with 24% unemployment, they have a 3% provision against their mortgage book…The mortgage book of Ireland has a 10% provision. What is going on in Spain is that 22% of Spanish mortgages have been reworked, half of them more than twice. In other words, there’s evidence that the banks have been evergreening loans. In which case, 7% of it, you have to take another allowance of 7% to get it to Irish levels against 650 billion euros. That’s another 50 billion euros there. And the same is going on in the loans to small and medium enterprises.”
On who has enough money to backstop Europe from a disorderly meltdown:
“On the day that Greece leaves, in order to circumvent bank runs and market mayhem, there would need to be an enormous announcement from the EU, there are two things that could be effective. I think we can rule an enormous money printing operation by the ECB. But I think the announcement of a eurobond for Europe would be something that would buy an enormous amount of time. It would have to be massive. The problem is, issuing a eurobond, I do not see that a hasty and ill-conceived monetary union can be solved by a hasty and ill-conceived fiscal union. Governments would need to cede sovereignty over their domestic spending to a central European entity, and I just can’t see that happening.”
“ I think that there’s a misconception also in the markets that Germany can ultimately pay for everything. The truth is that the European area is an economy as big as the United States. And Germany is 78% smaller than the United States.”
On whether Germany would exit the euro if the country doesn’t have the money to support the rest of Europe:
“I think an elegant solution, and I know it’s not politically acceptable, will be for Germany to manage an exit for itself from the euro, control its currency versus the euro, and then the remaining euro region could then print money, buy bonds, and instantiate a Fed mandate for the ECB, which have a mandate to minimize the loss of the economy versus inflation and unemployment.”
On how he’s trading Europe right now:
“The problem is you can make a pretty sensible argument for almost any outcome in Europe. It could be a run on the banks very quickly. The Greeks could end up staying in for a little bit longer. They could vote to take themselves out. There could be a eurobond. The whole situation could be overtaken by events. We could have bank runs in Spain. We could have LTRO. We could have a concerted bond-buying action from the ECB. You can make a sensible argument for almost any outcome it’s in such a state of flux right now. I think that when you get into these sorts of situations, the first thing you want to do is you want to ensure that your money is in a place where you like the credit so that if there is a major banking problem you’re not going to lose money on credit…The reason why the treasury market’s doing so well. Treasuries, and the short end of Europe with German government bonds, for two years now yield being essentially zero.”
On France and Italy:
“I think Spain is the battleground. I think that [France and Italy] come after. I think it will all be resolved in terms of where we end up with Spain, honestly. If Spain leaves, I think if Spain comes to a position where it has to leave, I think you’ll end up in a situation where either Spain leaves or Germany leaves.”
On whether a run on banks has already begun:
“I think that it’s been a crawling, slow run for a long period of time. 650 billion euros via the target two system has found its way into Germany, and that has come from the deposit base elsewhere in Europe. And as the stress has increased and we go towards a situation where Greece might actually – you’ve come to the realization that a euro in a Spanish bank and a euro in a Portuguese bank are not worth as much as a euro in a German bank.”
On JPMorgan’s 2 billion trading losses:
“I think JPMorgan – it’s well known in the Street – and I want to be very kind to JPMorgan as my biggest trader and former employer… My first job was at JPMorgan on Wall Street when I was 23. So I’ve got a very good disposition towards that bank. But I would say that if a bank in its normal course of its business has exposure to mortgage markets, has exposure to corporate accounts parties and the activities that they undertook in their chief investment office just increased them. So I don’t think they could be described in any way as a hedge. They’re not out of those positions. And if we end up with a catastrophe in Europe in the short run, they’re probably not positions that anyone would want to have.”
On whether the loss is broader than a trading loss:
“I think it’s a trading loss. They deliberately put the positions on. The London whale, who has subsequently been harpooned, put positions on and yeah, other people in the Street – BlueCrest and our credit fund, in the normal course of our business in a small way, not in any way looking to try and cause them any problems, we found some anomalies in the market. And I think that a number of credit funds found anomalies caused by these very large transactions, and possibly have taken the other side to provide market liquidity.”
On whether there’s any way for JPMorgan to elegantly extract itself from the situation:
“There’s always a price. There’s always a price to get out of anything. It might not be a price you like, but there’s always a price. So that’s true. It is in very high grade credit in the United States, so I think that they would ultimately be able to exit this position, yes.”
On whether he’d do the same thing as Jamie Dimon, maximizing the economic value of the trade over the long-term even if it’s going to come with some serious mark-to-market pain:
“Absolutely I would. There are other hedges. If corporate American credit really blows out, it’s likely that there are much bigger problems elsewhere. There are other instruments to hedge in. So yeah, I would be looking, if I was in that position, creatively at finding other avenues to reduce the value of risk of the book.”
Nothing like hearing the inside scoop from a man actually in the arena.
I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.