cost for a country hits 10% it is just a matter of time before the
wheels come completely off and a restructuring is the next step. I saw
this in Latin America many years ago. For sure, the status quo can be
maintained for a bit, but the inevitable result is that the situation is
unsustainable and not fixable short of a major restructuring of the
country's debt. These are the conditions that brought us the Brady Plan
of the Mid 80’s. The same conditions exist today for the PIGs:
A close up of the Greek 5-year. This bond is screaming for a restructuring.
So what's going to happen next? What might a restructuring of Greek debt look like? Things that are likely to result:
-There will be a range of options for holders of Greek debt.
-Principal forgiveness of at least 30% will be one option. In this case
there would have to be enhancement of both principal and interest on the
new debt. The exchanged bonds would be “money good” but they will still
trade at a discount from other AAAs because they will be “story bonds”
with limited demand and liquidity.
-Another option will be for no principal reduction (Par Swap) but an extension of maturities at a sub market interest rate.
-To have the slightest chance at acceptance and success the Par Swapped restructured obligations MUST
have credit enhancement on the principal of the debt that is exchanged.
The end result will be that either the IMF or the ECB (or some new Euro
guaranty mechanism) will be on the hook for Greece’s future
performance.
Let me make some guesses on how these new instruments would trade.
Assume that one held Greek Debt and was willing to exchange it for a new
20-year obligation. Assume the principal ‘haircut’ is 30%. The new
obligation is credit enhanced so that if Greece fails to pay interest
and/or principal on a timely basis the restructured creditor gets
payment from a Guarantor that is equivalent to a sovereign AAA. The
interest set (floater or fixed) on the new Obligation would be similar
to that of the Sovereign Guarantor (AKA: ECB). The new bond will trade
at a discount to its new par value, but it will trade above 90% of par
(@90 = AAA+80; that should find bids).
This means that if an old Greek bond is exchanged for a new enhanced
Greek bond it is worth a minimum of 63 cents. (.70 * .90). If the new
enhanced bond traded at 95% the equivalent would be ~67% cents.
Now the par swap option. Assume that one is willing to exchange an
existing Greek bond for a new one that has a 20-year maturity and a
fixed coupon of 3%. Assume further that the interest payment will have
no credit enhancement. The payment of interest will continue to be 100%
Greek risk. The payment of principal in 20-years would be guaranteed by
an acceptable Guarantor.
This creates a hybrid security that will trade as the sum of its parts.
The principal portion has a Net Present Value of ~44 (discounted at
4.0%; Germany +75).
The interest portion will also have an NPV value. A fixed Greek
obligation to pay interest at 3% would be discounted by the market by
(my estimate) at 10%. The current value of the discounted interest flows
is ~23.0. The sum of the two (Principal + Interest) is ~67.0.
The approaches I have used to evaluate post-restructured Greek debt are
hybrids of cookie cutters. There is a long road map of what happens when
a country goes bankrupt. I just apply the same rules. The guarantee
feature I use is both undesirable, and necessary. The “solution” that
will soon be forthcoming from the likes of the IMF will incorporate
these features.
If you use my numbers/analysis you come up with a range of future values
for Greek bonds of 63-67% of par. Of course one should not take these
estimate too seriously. I would discount them a bit further to be on the
‘safe’ side. Another 10% over my numbers and you get the mid 50’s as a
level where Greek bonds get interesting.
Guess what? We’re there already.
Am I recommending that one should jump into Greek bonds with both feet at this point? Hardly. I am suggesting that the market blowout in Greek bonds today has created the opportunity and the necessity for a restructuring. I think it will come by the end of the month.
If and when it does come, Greek bonds that are bought around 50% of par
could be a money maker. What concerns me is that as soon as this
restructuring is announced the ‘market’ will push Ireland and Portugal
to the same end.
Those that have been advocating debt destruction as the only possible
endgame of too much debt are about to see their thinking become a
reality. Where the process starts is now clear. Where it will end is
anything but.
Melina Mercouri was a not good weird looking actress that sold the Greeks down the river. Look what her cultural crap brought upon them. Ugh, Colonels and Melina, what do you have now?
Bruce, as much as I value your input to this forum, and have put your old stuff on other forums, I am not so sure about your final figures on the values.
I am being subjective while you are doing your best to be objective on what they can pay, or better yet, what they will pay.
Forget about Greece for the moment. The USA has a pyramid of debt that is heavy on the bailout of the bastards that have gutted us for two decades and especially the debt incurred from the bailout of the same.
I have zero intention of paying that back to the same slime that pulled the heist. If there was a way to separate bonding issues that actually did something to further the well being of the taxcows I would perhaps feel some slight obligation to pay it off. Nearly all of the exponential increase in gombit debt has gone to feed the bankster and consumers of wealth. I have no obligation to them and my daughters have less than zero obligation to paying off the feed to goomint supplicants and the central state functionaries. Ask any of us how much we should voluntarily pay to retire the debts of Homeland Security, and try the next fifty dozen hagfish colonies.
Greeks have lost the desire to pay for their rackets. It is coming here. You might want to gage public opinion of those that actually pay for this crap to calculate the return on sovereign bonds.
That said, your input is valued.
-------------------------------------
I see that after I loaded the link that there are several others that see it the way that I do.
Clever post Bruce on what works in the shorter term. I can see that, and agree that it could be a quick gain. In the longer term there is no way that the few productives that manufacture something of value from mining, agriculture and manufacturing of those inputs can shoulder the parasitic burdens that we have upon us now.
We that produce are assaulted on all sides. The pinworms that write the regulation are just wetting their drawers to get into private consulting so that they can steer the victims into contracts to help them somehow get through the maze of regulation without getting wiped out from fines and imposts. I, as many, are about to walk away from this crap and leave it all to the experts that blew us out of productive enterprise.
I'd rather take my chance at living small in a flyover town that has a sense of decency.
Make a killing shorting NBG
http://stockcharts.com/h-sc/ui?c=NBG,uu[h,a]waclyyay[pb40!f][vc60][iue6,12,9!lj[$spx]]
Why don't you fucking drop the euro. Open up the hotels and sell some fucking olive oil. And use your army to slaughter every mother fucker in the communications industry that sets up a split tap on your internet.
I'm having some problems with this analysis, not with Estimable Bruce K, but with the assumption that Greece is a going concern at 'X' level of indebtedness. Greece isn't by itself, the entire EU is insolvent and 30% haircuts here and there simply buy very small bits of time.
This is a Greek Tragedy unfolding: the ongoing decapitalization of the EU which is the unacknowledged 8- billion pound monkey in the room. What do Greece, Portugal ... Finland have to offer the world besides hordes of locust- like 'consumers'? The concept is oversold, a 'Plan B' has to include something other than a re- arrangement of the deck chairs on the sinking ship of Waste.
Euro restructuring rather than individual euro- using member state restructuring is in order. That and a turning away from 'growth' and automobile- centric 'development' which is simple economic suicide. Another year, more irreplaceable capital down the drain (or out a tailpipe or into a landfill) and what happens when there is insufficient capital to put food on tables?
Let's talk conservation, recapitalization (let the market price ALL kinds of capital not just credit) and currency flexibility. Let the bankers go to hell: they are certainly going to get there regardless- or because of what the ECB does.
Can Greece service its debt at libor +1/2 with no principal payment for 20 years.
Can Greece service 30% haircut bonds that have new debt service fixed at 4% for a few decades?
Yeah, I think they can. But I wouldn't assume that it holds together for more than five years. It's a short term bet. What isn't these days?
Was wondering when Leo would come to the rescue. Is that a recommendation for pension hedge funds to buy Greek bonds or is it an invitation for Greeks to migrate to Canada? Seriously ,perhaps time for another trip to Greece . Thorougly enjoyed Leo's last trip report and interview.
5% on the Ten Yr Tsy and Dow 8k on the way.
all I can say with Fukishitma and Greek Bonds is an Old Hendrix Song: "I Hear My Train A Comin"
20% on 2-year Greek bonds is a joke! Some global macro hedge funds must be salivating...where else can you get such high rates on short-term sovereign debt? Trichet et al., it's your turn....
Leo, you are a little out of your element. That global macro hedge fund is managing public sector pension funds.
20% on a 2y is not servicable. The reason to buy these securities is that the price plus a few months of coupon (maybe) will be less than recovery value or new restructure terms.
http://apeakunderthehood.blogspot.com/2011/04/prelude.html
Prelude
What needed is for Greece and Ireland and the rest join the BRIC Team, adopt a system of good money exactly as Libya did and form a block that relies on sound money. Africa should follow the Libya Plan, and the combined forces can not be dismissed.
I believe that once Japan discovers that the Rothchild/Neoconservatives were behind the destruction of their country by way of STUXNET, they will join to.
I really wish you would stop this ludicrous conspiracy theory nonsense. It was certainly not STUXNET, it was HAARP.
I think I hear the clock ticking. Soon, soon it will be our turn. What a freaking mess.
Sir, please, Which way to the News?
Where's that confounded bridge? Hey, http://www.thegardentapes.co.uk/tgt.html
and the Great Recession morphs into the Greatest Depression.
The only question I have is how much of the restructuring cost will be born by U.S. taxpayers? Our central bank seems to be rather generous when it comes to helping those in need, and what could be more desperate than a Greek banker with a tin cup in hand?
Good question. I thought about that. The answer is that the US can't pony up much to bail our Greece. We have too many problems at home to worry about a Euro problem. The politics say no.
As I set this up there is no IMF role of significance. This is a Euro bailout. It is up to the ECB to step up. That said, the IMF will have to a part of this. For every dollar the IMF plays for, the US has to step up for 25 cents. This is a potential dealbreaker.
"An anti-Khadaffi Libyan in Misrata" comes to mind. Just sayin' of course. "there are different gradations of desperation." And "America's help zone" seems to be shrinking no matter the words.
I think I would wait well past the end of the month.
We're in a game-theory experiment. First sovereign to default and find it isn't the end of the world emboldens the next. Why take Greek debt at 20% when, a little later on, you're going to be able to get the same deal on a nation that can feed and fuel itself?
The essence of my retirement plan is to start taking 30y USTs at 18%.
What good's an 18% long bond when real inflation is 21%?
or just buy gold. the physical of course.
Got plenty of PMs!
A bit off topic but does anybody know when those 100 billion in 100dollar bills will hit the streets?
Do they still stick to each other?
When will the ink dry?
So many questions...
By the time the restructuring comes, most of greek debt will be held by ECB and ESFS and it will be just canceled or maturity extended to infinity (in exchange for some kind of reforms). Dont expect a big show here.
so i should be a buyer then.(?)
Bruce, what about when treasuries were yielding over 10% in the early '80's? How do you explain that?
The high long-term interest rates in the US during that period actually helped the process. A 30 year bond used to secure the principal back then only "cost" about 9 cents due to the miracle of compound interest. In my example I use 4% as discount rate to value the guarantee. It is worth 40%. A very big difference. This is why I think that the ECB will go the guarantee route versus the Zero Coupon bond route.
I'm not so sure about the reading of the ECB. I don't see any "fences" that will steady the euro.
I suspect Greece with be dealt with using very conservative numbers to show the ECB means business and Greece is not getting a default on a silver platter. After the Finnish election, and similar expected results when Germany gets to vote, who will backstop the ECB?
If you make things too easy for Greece (being the first in default) do you assist "whomever" with being the first one out of the ECB? Would anyone value the ECB if the big boys behind it were Spain, Italy, France, Greece, Portugal... and eveyone else is on the fence?
Too easy on Greece you say? 20% for the two year is a death sentence. I'm not sure you could extract a greater price. Some of the 5-6 year paper is aready neary 50. That's plenty of pain for all involved.
I was thinking more about the ECB guarantee for anything of consequence. I suspect politics within the EU is shifting to the need to offer up the Greek economy as a sacrifice on the alter of the greater EU good.
Germany et al don't want to be preaching to an empty church and trying to conduct business using a push strategy. I suspect once people put aside their entitlements and get down to what is really needed, they can then move forward. Gemany et al could then conduct business using a pull strategy.
The Greeks will be bellowing in any event. There is some merit in giving them something to bellow about. The other actors about the stage could watch the play develop...
2 year @ 20% make your donation now.
My money is on another recession this fall... courtesy of US (and possibly UK) Budget/T-Bond/Dollar problems coming to a head.
You won't have to wait that long for a double-dip in the UK.
They will first get a gov lockdown but with no way back.
Millions will lose their jobs
And thanks to the eu open borders the population will run off to Germany and France leaving the country with outcasts and losers.
Immigration and relocations on a pretty large scale, and Europe knows this is coming.
I'm not sure about this. "It feels much larger." A debt downgrade of the USA results in a treasury rally (?) says to me "this is the end of the European Union" whatever it says about the clowns at S&P's. This would of course allow GREECE to simply "default" via a return to the drachma or amazingly perhaps even the greenback for a time. (can you say 2008?) the only thing we all know for certain of course is "it's all good for gold" so "that is all we know." that doesn't sound good for preventing a sovereign default of course! but i fail to see how it's bad for US debt or the dollar either.(???!!!) "These are nations" and from where i sit (and i am sitting) "these nations aren't Chad or Mongolia" but the "nations formerly known as Europe." more to the point "why doesn't S&P downgrade California or Illinois first?" And what about Japan which is still in the grips of "Fukushima"? I was taught "low interest rates exist due to a superior credit risk profile" not an inferior one. I gotta say "arbitraging Greek debt at THIS price vis-a-vis Germany" looks to my layman's eyes like a no-brainer. In short "if Greece leaves the EU thereby defaulting" who get's clobbered? Isn't it "the last one believing in finanical Union?" meaning Germany, right? And "the point of the European version of bailouts is to throw entire countries under the bus so that certain preferential banks stay solvent" yes?
They will first get a gov lockdown but with no way back.
Millions will lose their jobs
And thanks to the eu open borders the population will run off to Germany and France leaving the country with outcasts and losers.
Immigration and relocations on a pretty large scale, and Europe knows this is coming.
And as for France, we're broke (even the govt. says it) so don't even think about coming here.
Greeks are lazy and don't speak the language. Maybe Italy than :)
Belgium is to cold for them, they'd freeze :)
Does that mean some Med front property will be for sale cheap? I'm serious on this one, I would move there and be the richest man in the town, because I have soon to be worthless Dollars and some silver.
Before you get too carried away, please be advised that I've already got first dibs on Paxos. So keep your grubby mutts off, OK?
It already is.
I have some friends who bought a villa in Greece these last 2 years.
Very nice but lonely, everybody has moved to the big cities over there.
So if you can handle the peace and solitude in Greece it's like heaven and unbelievably beautiful in the countryside.
We're also thinking about buying a extra house in Spain or Greece, but something near a big city.
Spain also has the same problem. You can even buy entire towns in Spain for cheat. A town with 20 to 30 houses can be yours for half a million euros. So if you find some other people, you can buy a house for the price of garage over here :)
You know, our business elites are actually screaming for new foreign workers since the German birth rate is sub-standard (if it was worse, even the Vatican state would have a higher birth rate).
BUT: The average German does not want to see more immigration - especially from Turkey or other islamic countries.
And I don't know if this will work out. Germans expect already a massive immigration from Poland this year (following other East European nations) - but there is a major problem - we don't have the jobs. I know, I know - they're saying that Germanys job market is booming, but we still have a lot of (4-5 million) unemployed people and many more with minimum jobs.
Immigration has already ruined the job market in the United States, especially amongst higher-end workers.
That's bullshit. Look at all the dishwashers, janitors, farm workers, etc, etc, you fat lazy americans will never do those jobs. that's why your country is fucked and going to colapse. You fat lazy americans think you are entilteld to everything. You need those immigrants to do those jobs.
You are the victim of mainstream mindfuck. Without the illegals we would have to pay fair and higher wages thats all. Of which the LEGAL immigrants would benefit most. This small detail is of course never mentioned to the legal latino population to keep making them believe that wetbacks are good for America.
Being a farm worker, janitor, dishwasher is the easy in terms of challenge and stress to your head. With welfare and no college debt, they get more from the system then they put in.
A more difficult job would be to overthrow the ruling class in Mexico and actually create jobs for others by building an internationally competitive enterprise from scratch. That's what Americans do. At least they used to.