I smell a back door bailout of Greece here

Apparently, a Greek government bond issue taking place today was a rip-roaring runaway success. There were not enough bonds offered to satisfy the rampant demand for them, which is something of a turnaround from recent sentiment. Good for the Greeks; they get to fight another day!

There is still a wall of Euros they need very shortly to pay off previous debts that are about to come due though, and they will need the markets on their side in order to be able to sell off new bonds in sufficient quantity to enable them to pay off those earlier bond issues now. Think of yourself maxing out your creditcards, the bill is due and must be settled in full in a couple of weeks, and you are now desperate to find a new creditcard provider that will offer you as much new credit as you currently have outstanding elsewhere, so you can "pay off" all those debts you already had and which have come due. Yes, in this environment... good luck with that! I hope you have enough cash coming in to be able to pay the, probably significantly higher, interest rates you will need to agree to. Well, it's exactly the same for governments.

Now, as I say I am pleased for the Greeks that they have a little breathing space, because things were deteriorating too, too quickly for comfort lately. However, I cannot help but smell a rat here. What has supposedly changed so much in the space of a day or two? You think international bond investors switched that quickly from thinking "no way Jose" to "yes sir, I can boogie"? Uh-uh, me neither.

Here is my first thought on reading the BBC story linked below this evening then: I reckon some of the big European banks have borrowed a LARGE amount of cash from the European Central Bank (ECB), at a VERY good rate of interest (think in the region of 1%) so that they can buy these Greek bonds and do all of Europe's politicians a very big favour. The banks will get to enjoy the profit spread between the 1%-or-so that they pay the ECB for the cash, and the higher interest rate payments they receive from the Greek government - something in the order of 6.5%. I wouldn't be at all surprised if there was also a guarantee agreed by the ECB, so that the banks taking on these Greek bonds couldn't possibly lose if anything bad should still happen because the ECB would underwrite them as part of one of their asset swap programs.

Just a theory. It's also a theory that would explain the Euro still going down against the Dollar, in spite of what you would think would be a big confidence boost for the Euro bloc as a whole -- if there are a lot of new Euros being "printed up" for this purpose, that would signal a weakness in that currency due to basic supply-and-demand as always. I don't suppose you think anybody else that matters more than me might share a similar theory, to make that negative Euro reaction into a reality, do you?

http://news.bbc.co.uk/1/hi/business/8550653.stm