Buy the Rumor, Sell the News
The global equity markets have breathed a sigh of relief now that the euro zone’s policy-making troika—the European Commission, the European Central Bank and the International Monetary Fund—has finally sealed a Greek debt deal. But does anyone really understand how it’s supposed to work?
It was announced to much fanfare earlier this week that a grand bargain had been struck that would keep the European Monetary Union together for now, get the Greeks the assistance they need and bring the country’s debt down to 124 percent of its gross domestic product (GDP) by 2020 and below 110 percent by 2022.
However, while the announcement trumpeted those debt-reduction numbers, little was said about how exactly they would be achieved, aside from an extension of debt maturities and a deferment on the interest due on the amount the Greeks owe the European bailout fund until 2022. Those extensions and deferments don’t bestow some magical ability on the Greek government to meet its obligations.
The debt deal is already being heavily criticized in the Greek press precisely because it fails to spell out a path by which Greece can pay down its debt. Despite the fact that the Greek government has been working to raise revenues through privatization schemes, more efficient tax collection and outright higher taxes, the country has yet to produce a budget surplus. That’s largely thanks to austerity measures already forced onto the country that have pushed it deeper into recession.
Unless the Greek economy is given enough forbearance and even some measure of direct assistance, it’s unlikely that it will return to a level of meaningful growth any time soon. At the same time, if the average Greek can’t get behind the deal, it’s likely that more political turmoil in the country will only impede any recovery.
But even as the average Greek citizen bears the burdens of austerity, hedge funds and other investors that have bought up Greek debt over the past few years might actually find themselves getting a windfall if they can be convinced of its worth.
Another part of the deal is that Greece would work to buyback billions of euros worth of its debt from private investors. Again, the details of this part of the plan are about as clear as mud but it has been said that the Greeks will be offering about 35 cents on the euro for its bonds.
There’s speculation that the IMF wouldn’t go along with yet another Greek bailout without some form of a bond buyback. Consequently, Greek debt has traded higher over the past month or so, from about 18 cents on the euro to the current low of 30 cents.
Unfortunately, European finance ministers have said that the buyback price for the bonds can’t be above the levels they were trading at last week. Without the promise of some additional upside in the form of a premium, there are serious doubts that many debt holders will participate in the buyback, despite the fact that many of them are already looking at serious paper profits.
However, if the program fails to achieve the desired results, there is a real risk that the IMF might not release the EUR10 billion it has pledged to the latest round of assistance. If the IMF backs out, we’re likely to see the beginning of a domino effect, with other players dragging their feet as well.
In other words, this is a case whereby investors who are buying the rumor will probably sell the news.
Over the short term, the sigh of relief over the fact that a meaningful deal is even in the works will buy Greece some breathing room. This dynamic should even prove bullish for the euro.
But over the long run, even though the deal may help keep the Greek government solvent, it won’t provide enough of a kick to get the Greek economy out of its recession. And with unemployment at 25 percent, without some sort of direct intervention the Greeks don’t have a hope of growing their way out of their predicament.
This Greek economic tragedy is reminiscent of “fiscal cliff” negotiations now underway in the US. It doesn’t matter what language politicians speak, they all seem to specialize in kicking the can down the road.
We advise you to take this burst of optimism in the equity markets for what it is—a relief rally. We’ve seen this phenomenon before and it has always been followed by another round of pessimism. For now, do what the pros are doing, which is to buy the rumors and wait to sell the news.
It was announced to much fanfare earlier this week that a grand bargain had been struck that would keep the European Monetary Union together for now, get the Greeks the assistance they need and bring the country’s debt down to 124 percent of its gross domestic product (GDP) by 2020 and below 110 percent by 2022.
However, while the announcement trumpeted those debt-reduction numbers, little was said about how exactly they would be achieved, aside from an extension of debt maturities and a deferment on the interest due on the amount the Greeks owe the European bailout fund until 2022. Those extensions and deferments don’t bestow some magical ability on the Greek government to meet its obligations.
The debt deal is already being heavily criticized in the Greek press precisely because it fails to spell out a path by which Greece can pay down its debt. Despite the fact that the Greek government has been working to raise revenues through privatization schemes, more efficient tax collection and outright higher taxes, the country has yet to produce a budget surplus. That’s largely thanks to austerity measures already forced onto the country that have pushed it deeper into recession.
Unless the Greek economy is given enough forbearance and even some measure of direct assistance, it’s unlikely that it will return to a level of meaningful growth any time soon. At the same time, if the average Greek can’t get behind the deal, it’s likely that more political turmoil in the country will only impede any recovery.
But even as the average Greek citizen bears the burdens of austerity, hedge funds and other investors that have bought up Greek debt over the past few years might actually find themselves getting a windfall if they can be convinced of its worth.
Another part of the deal is that Greece would work to buyback billions of euros worth of its debt from private investors. Again, the details of this part of the plan are about as clear as mud but it has been said that the Greeks will be offering about 35 cents on the euro for its bonds.
There’s speculation that the IMF wouldn’t go along with yet another Greek bailout without some form of a bond buyback. Consequently, Greek debt has traded higher over the past month or so, from about 18 cents on the euro to the current low of 30 cents.
Unfortunately, European finance ministers have said that the buyback price for the bonds can’t be above the levels they were trading at last week. Without the promise of some additional upside in the form of a premium, there are serious doubts that many debt holders will participate in the buyback, despite the fact that many of them are already looking at serious paper profits.
However, if the program fails to achieve the desired results, there is a real risk that the IMF might not release the EUR10 billion it has pledged to the latest round of assistance. If the IMF backs out, we’re likely to see the beginning of a domino effect, with other players dragging their feet as well.
In other words, this is a case whereby investors who are buying the rumor will probably sell the news.
Over the short term, the sigh of relief over the fact that a meaningful deal is even in the works will buy Greece some breathing room. This dynamic should even prove bullish for the euro.
But over the long run, even though the deal may help keep the Greek government solvent, it won’t provide enough of a kick to get the Greek economy out of its recession. And with unemployment at 25 percent, without some sort of direct intervention the Greeks don’t have a hope of growing their way out of their predicament.
This Greek economic tragedy is reminiscent of “fiscal cliff” negotiations now underway in the US. It doesn’t matter what language politicians speak, they all seem to specialize in kicking the can down the road.
We advise you to take this burst of optimism in the equity markets for what it is—a relief rally. We’ve seen this phenomenon before and it has always been followed by another round of pessimism. For now, do what the pros are doing, which is to buy the rumors and wait to sell the news.