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Greece Bailout Plan's 'Three Weak Links'

Reaching back into the vinyl archives and pulling out the classic “Same Old Song and Dance” by Aerosmith not only provides an opportunity to give a shout out to one of the best things to come out of Boston since beans, it also serves as a timely and timeless reminder of how and when the Hellenic Hoopla began.

The boys from Boston lyrically described the fate of an addict who just won't change his ways. Today it has been reported — and Greece has denied — that the Hellenic Republic wants to renegotiate its "deal" with the EU and IMF. When Aerosmith recorded the aforementioned masterpiece, Greece was attempting to join the EU — alas it failed because it could not reduce its budget deficit. It took 3 more years before Athens was able to make the necessary cuts and join its European brethren … and that was something the Greek’s wanted to do!

Fate Comes a-Knockin'

We have opined, perhaps incessantly, that the Greek 'bailout' is flawed — beyond the typical political hostility — the structure of the plan has three weak links:

  • The austerity measures are based on raising taxes — but the measures are expected to clip GDP and create a smaller revenue pool to tax. The higher the taxes … the lower the pool … and never the two shall meet.
  • Without an explicit contingent bailout package the Greek's have more incentive to side with a population that is prone to violent protest, than to adhere to budget cuts.
    The higher Greek bond yields rise — the better the chance of a bailout — the incentive is to step away from the debt market.
  • As a reminder, this is NOT about Greece — the Greek plan serves as a road map for the rest of Club Med and more importantly the UK.

If the market loses faith in the EU's ability to solve the minor disturbance that is the Hellenic Hoopla, then the market will lose all confidence in the ability of much larger debtors to resolve their issues. This issue becomes more poignant today as a general election has been called in the UK for May 6. The mechanics of this move mean that as of next Monday the UK parliament will be dissolved and Britain will technically be without a government for three weeks.

Further news of a US Dollar based Greek bond issue comes today and in a brilliant piece of marketing, the Hellenic Republic is pitching the bond as an emerging market play ... one word: fantastic!

However, the markets have rejected the Greek twist and have pushed spreads over bonds to all-time highs. The third structural flaw with the bailout may just now be recognized by market players — the more Greek yields rise, the better a chance of a bailout. Therefore, the incentive is to step away from the debt market and await significantly higher yields … Fate comes a-knockin, Doors start lockin'.

No Smooth Face Lawyer Could Get Ya Undone

The rise in Greek yields on the news of an additional bond offering suggests that an EU/IMF bailout may be fait accompli – fear based market moves have the tendency to feed upon themselves. For our part, we have been short EURUSD and GBPUSD and will be adding to this trade today.

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Trader disclosure: On Apr 6, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Kelly Owns (FXE) Puts; Kelly Owns (FRE); Profit And His Firm Own (AAPL); Profit And His Firm Own (RIMM); Profit And His Firm Own (JPM); Profit And His Firm Own (GS); Jon Najarian Owns (AMZN), Is Short (AMZN) Calls; Jon Najarian Owns (SLB), Is Short (SLB) Calls; Jon Najarian Owns (WFT), Is Short (WFT) Calls; Jon Najarian Owns (AA), Is Short (AA) Calls; Jon Najarian Owns (AKS) Call Spreads; Jon Najarian Owns (X) Call Spreads; Jon Najarian Owns (NUE) Call Spreads; Jon Najarian Owns (RTP) Call Spreads; Jon Najarian Owns (BHP) Call Spreads; Jon Najarian Owns (AAPL) Call Spreads; Jon Najarian Owns (RIMM) Call Spreads; Jon Najarian Owns (MBI); Jon Najarian Owns (C) Preferred; Jon Najarian Owns (BAC) Preferred; Jon Najarian Owns (JPM) Preferred; Jon Najarian Owns (MS) Preferred; Jon Najarian Owns (WFC) Preferred; Jon Najarian Owns (AAPL) Call Spreads; Jon Najarian Owns (CMC) Call Spreads; Jon Najarian Owns (FCX), Is Short (FCX) Calls; Jon Najarian Owns (GS), Is Short (GS) Calls; Jon Najarian Owns (PDE); Jon Najarian Owns (RIG), Is Short (RIG) Calls; Jon Najarian Owns (RIMM), Is Short (RIMM) Calls; Jon Najarian Owns (WMT) Preferred; Finerman's Firm Is Short (IYR), (IJR), (MDY), (IWM); Finerman's Firm Is Long S&P Puts; Finerman Owns (AAPL); Finerman's Firm Owns (BAC), (BAC) Leaps; Finerman Owns (BAC), (BAC) Preferred; Finerman's Firm And Finerman Own (JPM); Finerman Owns (PDE); Finerman's Firm And Finerman Own (RIG); Finerman's Firm Is Short (SPY); Finerman's Firm Owns (USO); Finerman's Firm And Finerman Own (WFC) Preferred; Finerman's Firm Owns (WMT)

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