All Hail The Draghi Put: The Global Bond Market Is Now Well And Truly Broken

by David Stockman

The evil of modern central banking can nowhere better be seen than in this week’s mad stampede into $4 billion of Greek bonds. The fact is, Greece is not credit-worthy at nearly any coupon yield, but most certainly not at the 4.75% sticker that was attached to the offering. After a 20% contraction, the Greek economy has been literally eviscerated—with not much left except tourism, yogurt plants and a 27% unemployment rate. It has an impossible debt-to-GDP ratio of 170 percent and, worse still, almost all of that debt is owned by EC institutions and the IMF. That is, this week’s “winners” stand in line behind the “bail-you-in-first-brigade” that will find some way to crush private investors—-English law indentures or not—when repayment of their own tower of loans comes into question. And the claim that Greece’s fiscal affairs have turned for the better is really preposterous.  Like Italy and some of the other PIGS, the Greek government has discovered the trick of off-balance sheet financing by stiffing its vendors. The backlog of “payables” to pharmacies, hospitals, doctors, garbage haulers, road maintenance vendors and countless more, along with deep arrearages in payments to pensioners and other transfer payment beneficiaries, has been manipulated by the finance ministry and their Brussels overseers to a fare-thee-well, and now totals in the tens of billions. This has created the impression, of course, that Greece’s budget is on the mend; its actually on the road to yet another political crisis owing to the parched liquidity among vendors and the precarious finances of beneficiaries. And that’s to say nothing of the absolute fracturing of the Greek body politic, where its current lame government survives by kicking enough recalcitrants out of the Parliament, as may be needed, to clear the next Brussels demanded action with one vote to spare.  In short, Greek sovereign risk cannot be even calculated by the market because it essentially has no functioning sovereign. But none of this matters, of course, because the howling pack of money managers who scooped up the Greek debt at an oversubscribed rate of 5X were not pricing the non-credit of the former Greek state, but the promises of Mario Draghi—-the Goldman Sachs plenipotentiary temporarily seconded to Frankfurt. Even the New York Times figured out that this week’s ballyhooed “return to the market” was a complete farce: Investors may be playing a dicey game, but in the case of Greece and other shaky euro zone countries, they have been assuaged by the belief that the European financial machine will kick into gear should anything go wrong. European Central Bank President Mario Draghi has pledged to do “whatever it takes” to keep the crisis from reigniting. They even found one of the remaining sane spokesman for the EC apparatus to clear the air and verify that the offering had nothing to do with “price discovery”—-the ostensible purpose of capital markets: “Investors don’t look to the long-term health of economies,” said Simon Tilford, the deputy director of the Center for European Reform in London. They are looking at whether they can extract gains “without losing their shirts. At the moment, they figure they can, but that doesn’t tell us much about the sustainability of the euro zone or whether governments have taken it on a path to sounder footing.” Besides vast mis-pricing and mis-allocation of capital, central bank puts also drastically impair even the daily vocabulary and discourse in the markets—rudiments that are essential to effective and honest price discovery.  After noting what is the sheer lunacy of the “Draghi put”, and that the herd of fast money traders which chase it have driven the yield on Spanish 5-year debt below that of US Treasuries, the NYT found one money manager who wasn’t drinking the Kool-Aid. Fadi Zaher, the head of bonds and currencies at Kleinwort Benson, said his group had stayed on the sidelines due to “lingering concerns about the country’s poor economic health and its mountain of debt”. Still, after noting that “there is euphoria right now over the Euro area” and that the euphoria is spilling over to Greece, Mr.Zaher concluded by saying: “We are cautiously optimistic about the story, but looking over the longer term we are very, very cautious about it.” Well, that is the equivalent of an analyst “hold” rating, but the vocabulary speaks for itself. The crush of momentum trading and the herd kiting of central banks is so overwhelming that even a professional skeptic could only muster a “very, very cautious” utterance. In truth, the better utterance would have been a “sell, sell. sell”. Yet the very worst evil of monetary central planning is that it enables clueless politicians to believe in their own fiscal fairy tales, and to persist in the ritual can-kicking that is the scourge of central bank intoxicated politicians everywhere. In the context of its shattered economy, the Greek budget is a house of cards. Still, its current leaders, whose tenure is precarious by the day, get their turn in the spotlight to issue utterly specious pettifoggery: In Greece, officials declared victory. Yannis Stournaras, the finance minister, said the nation had made “the biggest fiscal adjustment ever recorded since World War II” in a bid to mend its finances. The prime minister, Antonis Samaras, said in a televised statement that the strong demand for the bonds was “a sign of trust in the Greek economy and its ability to overcome the crisis.”

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