The Absolute Return Letter - July 2011: What Happens Next?

“Anyone who isn’t confused really doesn’t understand the situation.” -Edward R. Murrow, Broadcaster

I can already hear the collective sigh - oh no, not another letter on Greece! The battle fatigue is evident. We are all exhausted from years of fighting the crisis but, at the same time, we are fast approaching the end of the road, at least as far as Greece is concerned, for one simple reason. Policy makers are running out of options, verified by their increasingly desperate reactions to undesirable news.

One recent example: Earlier this week Moody’s downgraded Portugal (in my opinion deservedly so). Governments across Europe, who in the past have been highly critical of the rating agencies for being behind the curve, suddenly criticised Moody’s for undermining their work. Long live hypocrisy.

No, this letter is about what is likely to happen after Greece has defaulted, which is where I am increasingly focused. The can may be kicked further down the road in order to buy additional time, and every trick in the book may be used to portray the default as a benign event (note, for example, the use of the word ‘rollover’ rather than the somewhat less pleasant ‘restructuring’ in the latest proposal), but default it will.