Greece Proceeds To Make Bond Shorting Impossible

Tyler Durden's picture

In their last solvent days, the Greeks sure are learning fast from the US - first America makes shorting prohibitive (and where it is still possible, various repo desks tend to force short covering at their whim just as the market is about to crash and burn), and now Greece has proceeded to make shorting of Greek bonds impossible. After realizing that its CDS scapegoating campaign was the most miserable and idiotic plan ever conceived, the lunatics who have taken over the Greek insane asylum have now decided to make shorting of GGBs virtually impossible. This is ostensibly the last step before the total collapse as the liquidity that will be removed will make swings in GGB so big it will make the holders of options in FNM, FRE, C and AIG green with envy. The mechanism by which Greece seeks to accelerate it own demise, is by introducing daily repurchase auctions to cover short positions, according to Reuters. Next stop: selling of any Greek (and soon US) security becomes treason and is punishable by death.

More:

Greek trading system HDAT, which is run by the central bank, told primary dealers of Greek sovereign debt the move was a response to the scale of open short positions on such bonds, according to a copy of the HDAT document obtained by Reuters.

This week financial markets hammered Greek bonds and bank shares, driving the euro zone member's borrowing costs higher and pushing it closer to tapping a last-resort European Union-International Monetary Fund safety net.

"Due to massive debit position in HDAT transactions, the Committee of Primary Dealers Supervision and Control decided as of today and until further notice to automatically proceed to repo auctions, at the end of HDAT trading day, in order to cover all transactions with such debit positions," the statement obtained by Reuters said.

Traders said the decision meant that any uncovered short positions on Greek government bonds would have to be covered, regardless of the price, at the end of the settlement day in the repo auction.

This would make it more difficult to short Greek bonds but might end up affecting market makers more than others, according to some traders.

Year-over-year, trading volume rose 35.9 percent in February. Daily average turnover in February fell to 0.99 billion euros from 1.1 billion in January.

Greece's borrowing costs have surged as markets worried about the country's soaring deficit, its debt load and its ability to rollover debt.

Greece is rapidly becoming a case study in everything crazy that America will try to pull off once our own curtain is pulled and the magician-cum-emperor behind the curtain (Ben Bernanke of course) is finally shown to the general public in his entire naked splendor.

A brief overview of HDAT:

The Bank of Greece, has one of the most technically advanced electronic trading system for bonds - HDAT - the electronic secondary security market - and this system can easily be developed further to handle retail transactions on behalf of individual banks. The Bank of Greece's immediate goal is, in collaboration with the banks, to promote retail bond transactions. In the last five months the Bank of Greece introduced the electronic trading of repurchase agreements in HDAT and an electronic credit management system, so that market participants can control their exposure to risks. Moreover, non-resident financial institutions will soon participate in HDAT. Their treasurers from their screens in London will trade Greek bonds through HDAT. This remote access system will be further enhanced in 2000 when, as we plan, HDAT will apply to be connected to the European MTS system and hence participants of HDAT will be able to trade directly in other European markets. Transactions in HDAT were just less than $ 10 billion per month over the last twelve months and $ 14 million per month the last two months, but more importantly, HDAT prices are the official and undisputed reference prices. These are used for direct trading between financial institutions and between the latter and their clients, so that the total volume of bond trading registered by the Bank of Greece Security Settlement System in a book-entry reached Euro 45 billion per month in the last twelve months, and 65 billion per month in the last 2 months. HDAT is a fully integrated market, inter-linked with the settlement system of the Bank of Greece. Settlement amounts are processed automatically and clearing is effected without any involvement of trading counter-parties.

Without HDAT it would have been impossible for the interest rate spread between bid and offer to have narrowed to less than 25 b. points from more than 300 basis points prior to HDAT. Likewise the interest rate spread over the 10 years bund from more than 300 basis points has been reduced to some 90 basis points. The related budget saving of interest payments is estimated at least Euro 250 million per annum and probably more. The development of HDAT will continue so that it can meet at any moment the highest technical and safety international standards, and in this way Greek bonds can be at par with other paper used for monetary policy operations by the ECB. In this connection, the Bank of Greece will soon introduce a fully automated valuation system enabling the Bank to apply haircuts on the market value of securities on a daily basis (i.e. the present 20% haircut will cease); the lowering of haircuts will remove a competitive disadvantage faced by Greek banks holding securities, thus further enhance their attractiveness. Using rigorous quantitative assessments of price behaviour of government bonds the bank will utilise soon market-oriented risk control methods in its collaterilised lending to domestic banks in contrast to methods based on face values. A corporate bond market is also expected to develop as gradually the tax treatment of corporate bonds is aligned to that of government bonds. A mature corporate bond market will also help to relocate (back to Greece) part of loans now raised through other European financial centres, often loans granted by greek banks operating abroad.

In a low-yield environment investors are increasingly seeking for return enhancement, and corporate bonds offer better return than government bonds. Likewise, more and more banks prefer to manage and issue bonds on behalf of their clients rather than to provide outright loans which affect their balance sheet and, their liquidity. Moreover, fees for issuing and managing a bond combined with the fact that a bond does not carry a credit risk often provides higher profits to the banks than loans. We think that there is still big potential for the development of the greek government and corporate bond market after Eurozone entry and this , despite the narrowing of the spread over the 10 year bond yield, which will encourage some investors to move to higher yielding emerging markets. We expect that his will be considerably more than compensated by investors who prime security (particularly pension funds and insurance companies) and the 30-40 basis points higher yield of the greek 10 year bonds will attract them. Indeed, there is a sizeable untapped market. Pension funds of larger countries which now focus on their home market, will gradually diversify their investments into other Eurozone countries and in Greece in particular as the currency risk is eliminated and credit risk gradually becomes nil as the government debt/GDP ratio moves to below the 100% and towards 60% mark. Other things being equal (i.e. risk premium), investors will be more aggressive and look for higher yields and for pension funds a yield difference (premium) of 0,40% per annum over the Bund cumulated over 10, 20, 30 years will weight heavily in financial investors choice.