How to Play the 'Reprofiling' of Greek Debt

Today comes the latest in a long list of euphemisms for a Greek debt default, this one courtesy of Eurogroup head and Luxembourg PM Jean-Claude Juncker:

“If all these conditions are fulfilled, we can discuss the question of reprofiling,” Juncker told reporters late yesterday after chairing a meeting of euro-area finance chiefs in Brussels. “It’s not reprofiling or nothing. It’s measures, measures and measures, and then maybe reprofiling.”

Source: Bloomberg

While it's unclear how many of Europe's leaders are in agreement with Juncker, at least some of the Eurozone's grownups have begun to publicly acknowledge what the market has been communicating for awhile, which is that maintaining the current Greek debt program is hopeless. John Mauldin spells out the inescapable arithmetic:

(Greek) GDP at -4.5% in 2010 and still likely to be -3.0% in 2011 (Source: IMF). If your economy slows down by 10%, then your debt-to-GDP ratio rises by 11% without any new debt. And Greece is being asked to further reduce its deficit by what is in effect 15% of GDP, while taking on no more debt. Within two years Greece will have a debt-to-GDP ratio of 160%.

No country save Britain...has ever recovered from a debt-to-GDP ratio of over 150% without a default. None. 

And the reason is simple arithmetic. Even a nominal interest rate of 6% means that it takes 10% of your national income just to pay the interest. Not 10% of tax revenues, mind you; 10% of your total domestic production. That is a huge burden on any country. It sucks up half your tax revenues (or more), leaving not enough to pay for ordinary government services like police, defense, education, pensions, health care, etc. 

Greece runs a massive trade deficit with the rest of Europe, which just makes the problems worse. Unemployment in Greece is now 15% and rising.

The details of Greece's default (aka 'reprofiling') appear to involve some type of maturity extension in exchange for an acceleration of Greek government cuts and 50 billion euros of privatization, which translates into selling about a fifth of the property that the Greek state owns.

The question now becomes how much appetite is there in Greece for any additional cuts and the selling off of state assets to pay back the foreign banks (primarily French and German) which lent Greece money? And are the Greeks really willing to put up 'collateral' (e.g, Mykonos?) in exchange for any additional financial assistance from Germany?

Continue reading the full article at SeekingAlpha here.

Investment Implications of Bin Laden's Death

Osama bin Laden was living not just within the borders of Pakistan, butwithin a mile of arguably the heart of the country's military establishment. Conspiracy theories abound, but it seems clear thatPakistan knew a lot more than it was letting on to its U.S. and NATO 'allies' operating in the region.

From 2002 to 2010, the U.S. gave $20 billion in aid to Pakistan ($13.3 billion in military and $6 billion for economic development). Over $3 billion has been requested for 2011.

At a time when Congress is sharpening its fiscal pencil, it's no surprise to see that Senators are pushing to cut Pakistan's aid. Expect calls for U.S. forces to pull-out of Afghanistan to only grow louder, which in turn will have a destabilizing effect on Pakistan and the wider region.

Investment Implications

Pakistan is classified as a 'frontier economy', and the range of pure play investment options that foreigners can easily make are limited. At present there are no U.S.-exchange traded Pakistan ETFs. However, the Aberdeen Emerging Markets Telecommunications and Infrastructure Fund, Inc. (ETF), and Guggenheim Frontier Markets ETF (FRN) both have Pakistan allocations. And not surprisingly, both have traded down since Monday's news.

Continue reading the full article at SeekingAlpha here.

Analysis: Bin Laden's Hideout Strategy and Pakistan's Lack of Credibility

Osama bin Laden was living and killed about 100 kilometers outside Pakistan's capital of Islamabad in a relatively posh part of Abbottabad, Pakistan called Bilal Town.

The compound itself was located a short distance from the Pakistani military academy (the "West Point or Sandhurst of Pakistan" as it's being characterized). Detailed maps, satellite imagery and the CIA's diagram of the compound can be viewed here.

The Lair

His five-to-six year old property, believed to have been purpose built to hide the ultimate 'High Value Target' (HVT), was three stories tall and approximately eight times larger than any other nearby dwelling. Other key details:

• 12-to-18-foot walls, topped with barbed wire
• Internal walls sectioned off different areas of the compound
• Access was restricted by two security gates
• Closed-circuit cameras positioned around the property

Yet bin Laden's "mansion", as it has been characterized, did not have a phone line or internet. The couriers, Afghans brothers named Arshad and Tariq who were also gunned down by ST6, did not report any income and had no visible source of wealth. They also burned all their own trash. Neighbors also reported that the women who were living inside the house spoke in Arabic and not the local dialect.

Bin Laden's Hideout Strategy

Bin Laden's choice to hide near Pakistani military installations and in a residential community of retired Pakistani officers strikes me as both intriguing and suspicious. Less wise, perhaps, were some of the activities noted above, like burning the trash and not having a phone or internet line.

In short, Bin Laden stopped just short of hiding in veritable plain view. Did his failure to go all the way here do him in? One thing we do know is that the U.S. was only able to locate bin Laden by trailing his courier back to the compound in August 2010, and the whole reason bin Laden had to employ the services of a courier was due to his aversion to phones and the internet.

This location at least gave bin Laden some chance as the first assassination option considered by President Obama, employing B-2 Stealth Bombers, was abandoned due in part to the likelihood of collateral damage.

Was bin Laden's thinking on where to locate influenced by his correct calculation that the U.S. was unlikely to drop a bomb or conduct a Predator drone strike on this particular location? In turn, was bin Laden expecting a tip from Pakistani intelligence should any planned U.S. Special Forces assault to be attempted?

Who Does Pakistan Think They're Fooling?

Bin Laden apparently lived in this compound for the last 5-6 years. This raises very important questions about how much Pakistan, or elements of Pakistan's military and intelligence service, knew about the whereabouts of bin Laden. The U.S. has sent billions of dollars to Pakistan over the past several years to help find and kill people like bin Laden, and the American public should insist on an answer.

Pakistan has publicly denied knowing that bin Laden was within its borders. But if that's true it makes Pakistan look incompetent, particularly in light of the fact that Pakistan's most powerful man, General Ashfaq Kayani, the chief of staff, was within shouting distance of bin Laden last week giving a talk at the military academy on how Pakistan had broken the back of terrorism. More from The Economist on on the logic behind why Pakistan may have been providing bin Laden safe harbor:

Something's wrong with this picture

More likely, but no more attractive for the likes of the ISI, is that at least some in power in Pakistan knew that Mr bin Laden had been forced by American drone attacks to shift from a mountain hideout to this urban shelter. On this score Mr bin Laden (and probably others, such as the Aghan Taliban leader, Mullah Omar, who was reported earlier this year to have been taken by the ISI to Karachi for medical treatment following a heart attack) was being afforded some measure of protection by Pakistani officialdom. Why? Perhaps so that he could be used, one day, somehow to promote Pakistani interests among fighting groups in Afghanistan, or perhaps so that he (bin Laden) could be used as leverage over the Americans on a “rainy day”, as one Afghan intelligence officer speculates.

Let's be clear about Pakistan's motive: the longer bad guys like Osama bin Laden, Mullah Omar, and the presume new Al Qaeda boss, Ayman al-Zawahiri, are kept alive, then the longer the billions in U.S. dollars in development and military aid will keep flowing to Pakistan.

From 2002 to 2010, the U.S. gave $13.3 billion in military aid to Pakistan, and $6 billion for economic development. Over $3 billion has been requested for 2011. Calls for U.S. forces to pull-out of Afghanistan will only grow, which will have a destabilizing effect on Pakistan and the wider region. It's no surprise to see that Congress is already moving to cut Pakistan's billions of dollars in annual U.S. economic and military aid.

As Pakistan plays their double-sided game, the U.S. Congress and President Obama need to think seriously about how much good all this aid is really doing in the fight against terror.

The history between Pakistan, the U.S., and the region is long and complex and for those familiar with it it really shouldn't come as a surprise that Pakistan was harboring bin Laden. For further reading I highly recommend Legacy of Ashes, by Tim Weiner, and in particular Ghost Wars, by Steve Coll. You can find both books in the 'Good Books and Film' section on the right side of this blog, and here is a recent interview with Steve Coll, David Ignatius of the Washington Post, and Dexter Filkins of the New Yorker.