WHO´S THE REAL BENEFICIARY OF THE GREEK BAILOUT ? / BARRON´S MAGAZINE ( VERY HIGHLY RECOMMENDED READING )

Up and Down Wall Street

THURSDAY, MAY 6, 2010

Who's the Real Beneficiary of the Greek Bailout?

By RANDALL W. FORSYTH

AS THE EUROPEAN DEBT CRISIS turned deadly Wednesday, the effects appeared to spread increasingly from the sovereign debtors to their creditors, the banks. And that is the contagion feared most by the financial markets, and the one the €110 billion bailout for Greece from the European Union and the International Monetary Fund ultimately seeks to contain.

The cost to insure government securities of the worst-indebted nations of Europe soared Wednesday in the credit-default swaps market, and the CDS of major banks increased in tandem. Greek CDS wound up at 843 basis points, within shouting distance of Argentina at 931 basis points and Venezuela at 983 basis points, according to CMA Datavision. (Each basis point represents a $1,000 in premiums to insure $10 million in debt for five years.)

Meantime, Portugal's CDS meanwhile widened sharply by 70 basis points, or 20%, to 414 basis points, while Italy CDS widened 24 basis points, 15%, to 187 basis points. Banks in those respective countries had similar moves, with Banco Espirito Santo at wider than 500 basis points while Unipol Gruppo Finanziario hit 184 basis points for its subordinated debt. Spain's biggest banks, Santander and BBVA, moved out past 200 basis points.

U.S. banks' CDS also widened out with "significant activity," reports Otis C. Casey III of Markit, a credit-derivatives data provider. Goldman Sachs (ticker: GS) widened 11 basis points, to 180 basis points. (Meanwhile, the other most-hated company on the planet, BP (BP) had the biggest widening in percentage terms, by 27%, or 17 basis points to 79 basis points, Wednesday after Moody's changed its outlook on the oil company's credit to negative because of its potential liability for the massive spill in the Gulf of Mexico.)

"This is not as simple a contagion of sovereigns to financials (linked via holding government debt, ratings arbitrage via Basel II and capital exposure)," writes Tim Backshall, chief credit strategist at Credit Derivatives Research. "It is a systemically bad situation for EU growth as fiscal austerity is critical everywhere."

Beyond the esoteric world of derivatives, the stresses are beginning to appear in the European money markets, with a widening between overnight and three-month repurchase agreement rations, Backshall also notes.

"It is quite clear (even as the [European Central Bank] says they will take any old junk as collateral) that there is a growing risk aversion to carrying collateral on repo for anything other than very short-term. This should have the hairs on the back of your neck rising a little and we suggest that as this chatter came out, the market started its down leg this afternoon with financials leading down," he comments.

Banks, as much as sovereign debtors, are the ones at risk in the crisis. And it would appear banks are the ones the authorities really aim to rescue.

That's the inference that Joan McCullough of East Shore Partners draws from the call by Axel Weber a member of the ECB council and president of the Bundesbank for German legislators to support the deal, not as a bailout of Greece but "as a stabilization of the euro." (The currency without a country plunged to a 14-month low under $1.29 Wednesday as the photos of firebombs in the Athens riots beamed around the world.)

This notion of "stabilization" has a not-so-noble precedent. In Joan's own inimitable words:

"Rewind to 1994. Mexican Peso default and devaluation. [National Economic Council Director Robert] Rubin dug around in his bag of tricks and came up with the Exchange Stabilization Fund. Which most did not even know existed. Until that moment. The purpose of the ESF per FDR who established it, is to stabilize the US dollar. So Rubin put forth an explanation demonstrating that in supporting the Peso, in a roundabout way, we would be supporting the U.S. dollar. Bang. Zoom. They raided the ESF and 'stabilized' the Peso. Which was bullschmitt. As everyone knew that the money was goin' south of the border to bail out those huge U.S. funds who had gotten caught long Mexican debt and were trapped as it were. Thus, the true bail-out was of U.S. investment funds. Period.

"Well, it's the same with the IMF/EMU bailout. As it is quite obvious that the not-so-hidden agenda is to support the exposure of the foreign banks to Greek sovereign debt. Because Greece itself is disposable, don't kid yourselves. But the damage to the German and French banks, just to name one bunch of greedy dopes, would be of such an extent, they believe, as to destabilize the whole area with the euro taking the brunt."

The ECB holds its regular policy meeting Thursday, as luck would have it, in Portugal. What ECB President Trichet may come up with the deal with the growing European bank funding problems will be the highlight of his chat with the press after the confab. Stay tuned.

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