Greek creditors say they will return to negotiations in Athens Wednesday: is a Greek default priced in?
Sounds like a shocking question, doesn't it? But it should be asked.
By "default" I mean a disorderly default, outside the terms being negotiated now.
Last week, I speculated that a one-notch France downgrade was likely priced into the market, where a two-notch downgrade was likely not fully priced in. We got our one-notch downgrade of France — and indeed, markets are up, it appears it was priced in.
The argument that a Greek default may be largely priced into the market is based on the idea that that ECB will somehow buffer bank losses as they are now backstopping sovereign auction rates.
The other argument for a "priced-in" argument: everyone thinks a default is coming, but we haven't fallen apart. "Seems like market coming to some kind of acceptance — no facts have changed for weeks, yet here we are," one trader told me this morning. This is the old "lack of a downside" argument: "We haven't gone down"... "I must pile in"..."risk is behind us."
My take on this: I don't think a Greek default is even close to fully priced in: 1) ratings action mean a lot less than a sovereign default, 2) ECB is going to have a capital loss if this happens, and I don't think that is priced in, and 3) the "knock-on" effects are still too, well...unknowable to have such confidence.
Citi earnings conference call this morning make for interesting commentary.
My favorite comment comes from Citi's CFO, John Gerspach, who said the market "doesn't need Europe to be solved," it "just needs assurance Europe won't be a complete disaster."
Mr. Gerspach also told us what we already knew: that their trading activity was down significantly, largely because clients were significantly reducing risks.
More importantly, he noted that investor activity was significantly weaker in December, largely around concerns of a significant slowdown in Europe.
Those concerns have eased somewhat since then, but I doubt activity has picked up.
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