Seeking Alpha
June 19, 2011
Don’t be fooled by the IMF’s announcement that Greece will get a new round of money. This bailout will give the parties a couple of months to seriously negotiate what haircuts and debt extensions investors need to take in Greece, Ireland and Portugal. Virtually all of the comments made by the involved parties support the view that we are now in a phase where people are negotiating how much they will write off and what else they will do. Almost none of the comments indicate that anyone is really trying to put together a plan that is going kick the can down the road for a long time. I am fading this rally as only the most optimistic investor can believe that this problem won’t lead to real default/restructuring with haircuts in the next couple of months.
It looks like Greece has failed to meet the criteria the IMF had set out to provide more money, yet the IMF seems intent on releasing the next tranche. Banks typically waive covenants and release more money only when they truly believe that the borrower will turn around, or when they extract enough value from the borrower that they feel safe making the new loan, or when they aren’t prepared to deal forcing the borrower into default.
Does anyone really believe that Greece is going to get turned around? I don’t. In fact, I am highly confident that Greece will still not meet the criteria the IMF has set out when it is time for the next tranche. That will be the deadline for the default/restructuring. The IMF can waive the covenants this time because they will shortly get to review the progress again and can fail them at that time.
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