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The Pensford Letter - 6.29.15
The Pensford Letter - 6.29.15
Well, that was an interesting week. Treasurys sold off on the long end of the curve, with the 10T
rising more than 20bps on the week before closing Friday at 2.47%. Continued strength in
domestic data, led by consumer spending and housing, served as the catalyst for the move.
Couple this with rumor after rumor about positive (yet unsubstantiated) news out of Greece, and
the result was an appetite for risk.
Heres the thing Greece isnt even resolved. A 0.20% jump in rates at the very moment the
Greece bailout is negotiated continues to shock surprise us. Weve been complaining for months
that the market was underestimating the possibility of a Grexit, which was pricing in almost a
0% chance of a Greek default. We didnt think a Greek default was likely, but it was certainly
more than 0%.
Then this weekend happened. Tsipras ended negotiations with the ECB and IMF, turning down
the terms of the bailout package to release 7.2 billion because of the severe taxes and austerity
measures attached to the funds. Tsipras said he would recommend to the Greek public that they
vote against the measures in a referendum on July 5th. Tsipras called for the referendum
Saturday and the Greek Parliament approved it yesterday. Tsipras requested, and was denied, a
one month extension of the emergency bailout negotiations by the Eurozone Finance Committee.
Sh8t just got real (my grandmother reads this, so I couldnt swear outright).
Before the vote on July 5th (and lets assume the outcome is a resounding no), Greece is due to
make a payment of 1.5 billion on Tuesday, funds most believe the country does not have.
Assuming it does not make this payment, Greece will become the first developed nation to
default on a payment to the IMF.
Greek Default
Assuming Greece defaults on its payment Tuesday, it doesnt mean financial markets collapse on
the spot. None of our readers defaulted on loan payments during the crisis, but I have heard
anecdotally that a few commercial real estate loans defaulted during that time period. One
month payment falling into arrears doesnt mean the bank loses the entire loan amount on the
spot. Same thing here. Its more about the principal (pun intended) of it.
But Im not sure how much planning Greece has done to unveil its own currency, which it would
need in order to exit the euro. Tsipras has only been in office late January and his hands have
been pretty full trying to negotiate a new deal.
Just as importantly, the ECB will have a tough time extending its ELA, set to expire Tuesday as
well, to Greek banks at the same time the government is in default to the IMF. I bet most Greeks
spent the weekend running around to ATMs trying to withdrawal as much money as possible. If
Greek banks open Monday (and they might not), there could be limits on withdrawals.
No matter how many times I try to warn my kids about one thing or another, sometimes they just
need to endure a little bit of pain to really learn the lesson, and I wonder if the same applies here.
The Greek banking systems is about to endure quite a burden, and perhaps Lagarde, Draghi, and
Merkel are like the parents that finally throw their hands up and say let me know how that
works out for you. What is Tsipras Plan B? Youve got no currency, no credibility, and no
contingency. Your leverage is basically Things are so bad here that they cant really get much
worse, but can you guys really afford for us to default?
Economic Data
Day
Time
Monday
10:00AM
10:30AM
9:00AM
ISM Milwaukee
47.7
9:00AM
0.12%
10:00AM
97
95.4
7:00AM
1.60%
8:15AM
211K
201K
10:00AM
0.60%
2.20%
10:00AM
ISM Manufacturing
53.1
52.8
8:30AM
230K
280K
8:30AM
Unemployment Rate
5.40%
5.50%
8:30AM
270K
271K
8:30AM
Continuing Claims
10.80%
8:30AM
Underemployment Rate
2247K
8:30AM
62.90%
9:45AM
54
10:00AM
Factory Orders
-0.50%
-0.40%
Tuesday
Wednesday
Thursday
Report
Forecast
Previous
1.50%
3.40%
-16.8
-20.8
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