Greek "Rollover" Bailout Proposal On Verge Of Collapse, After Germany Puts Bond Swap Idea "Back On The Table"

Tyler Durden's picture

The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

And while Asmussen is not aware of the nuances of a debt exchange, his colleague Schaeuble sure is:

Finance Minister Wolfgang Schaeuble wrote to his euro zone colleagues, the European Central Bank and International Monetary Fund last month demanding that banks holding Greek bonds swap their bonds for new ones with maturities seven years longer.

But rating agencies signalled then that such a step would be akin to a rating event and the ECB, European Commission and France pushed for a softer solution involving a voluntary debt rollover, prompting Germany not to insist on its bond swap idea.

Ergo: dead end.

More on the currently proposed rescue model:

Asmussen said the French model may set "too clear" incentives for private creditors to participate.

"The model certainly has advantages in the sense that it gives clear incentives for financial market participants to contribute voluntarily. But the question is: are the incentives maybe too generous?" he said.

Work was being done to modify the proposal, especially with a view to lowering the interest rate Greece would pay on its debt, but other options including the bond swap would also be considered.

"First, one has to look how can one modify the French proposal in a way that it is still attractive to financial institutions," Asmussen said.

"But one element one needs to look at is the interest rate that Greece has to pay because the higher the interest rate, the more negative it is for the debt sustainability situation of the country," he added.

This is all fine and great, however, as the WSJ reported yesterday there is one big problem: the private holders have already sold the bulk of their holdings.

Europe's hopes for a significant contribution by private bondholders to a new bailout for Greece are fading, as it becomes clear that banks have sold off a substantial proportion of their Greek government-bond holdings despite pledges by some of the institutions not to do so.

The problem is that the banks and insurers at the negotiating table no longer hold as much of the debt maturing through 2014 as they did a year ago. In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years. Yet the current Greek debt holdings of those institutions suggests they have sold some of their holdings anyway.

There isn't detailed information on how much Greek debt German and other European financial institutions may have jettisoned. Allianz SE, the German insurer, has said it holds €1.3 billion in Greek bonds, compared with €3.3 billion last year. The company has said it would be willing to roll over about €300 million under the current proposal.

So who controls the fate of Europe now? Why hedge funds of course.

Analysts said banks were likely to have sold off short-term Greek debt because it trades at a smaller discount to face value than does longer-term debt. Meanwhile, hedge funds and other investors, who are likely to have bought up the paper, are less likely to be persuaded to engage in the debt rollovers being proposed by euro-zone governments.

Funny: it was precisely a month ago that we explained why "every single Greek bond in recent weeks has been purchased by hedge
funds who have remembered that the economics of "nuisance value" when
the upside of bluffing the EUR printer is virtually unlimited."

Ah irony: prepare for a massive scapegoating campaign aimed at hedge funds any second, only a diametrically flip flopped one: this time instead of accusing hedge funds of shorting Greece and Europe by being short various sovereigns by being long CDS, hedge funds are about to get bashed in the media everywhere for being... long paper.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
snowball777's picture

C'mon Europe...get it into your heads.

"Timely payment in full", bitchez.

idea_hamster's picture

will the market, head currently deep in the sand

That doesn't smell like sand....

youngman's picture

"Timely payment in full"

That is what it used to its "we will pay you back...we just don´t know when"

RichardENixon's picture

"I will gladly pay you Wednesday for a hamburger yesterday."

Ahmeexnal's picture

What's the difference between the ECB and a large pepperoni pizza? The pizza can feed a family of four.

Herd Redirection Committee's picture

  "In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years."

Wow, just wow.  They made an unbinding pledge, wtf is that?  Is that even a pledge? 

"We promise to probably keep our word"

Jubilee... Grand Debt Restructuring, bitches!

Alpha Monkey's picture

Sure it's a pledge.  But one where if they don't keep it, there is no recourse for.  I imagine that so long as they are on the winning side, they will stick to the pledge.  If it loses favor for them, they can walk away.

Sudden Debt's picture



You can pick the day, we'll pick the year.


Thorlyx's picture

....Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning, huh? Fuck you, pay me...

slaughterer's picture

Some further investigative reporting is needed.

Which hedge funds hold Greek paper?  Do they have a history of acting as a nuisance to such sovereign debt roll-over plans?  Are they involved in the current negotiations?  What is their perspective on how the talks are going?  What type of responses are they crafting for the likely outcome of these talks?

Expect this "Greece plan discussion" to continue well through July until the US debt ceiling talks divert media attention.  By August, all bets are off for Greece, and we will be well on our way to contagion.

oogs66's picture

The French plan helped the banks.  Now maybe they will really do something that takes a real hit and gives Greece a real chance.  They may be shocked to find out that most was priced into their shares already. 

qussl3's picture

Markets dont care.

DOW positive on a downgrade, rate rise and increased job cuts.

Gotta love it.

EscapeKey's picture

I, for one, look forward to more sex scandals on the front of newspapers.

williambanzai7's picture

This can and no doubt will be arranged in short odor.

Dick Darlington's picture

Ah irony: prepare for a massive scapegoating campaign aimed at hedge funds any second, only a diametrically flip flopped one: this time instead of accusing hedge funds of shorting Greece and Europe by being short various sovereigns by being long CDS, hedge funds are about to get bashed in the media everywhere for being... long paper.

Aahahahaaa, this one's priceless!

Quintus's picture

The Euro is dead, that's been clear for a long time now.  Someone please just bury it - it's starting to stink the place up.

Dreadker's picture

Are any fiat currencies still alive?  The Euro is just going to be the first to pop its clogs in the ICU...  The feeding tubes are slowly being removed and the ventilators can't run much longer lol

Quintus's picture

Quite so.  All fiat currencies are, as an inherent part of their nature, temporary and unsustainable constructs requiring perpetual and ultimately parabolic increases in debt simply to continue to exist.  Clearly this is a nonsense.


Hmm...'s picture

All fiat currencies are, as an inherent part of their nature, temporary and unsustainable constructs requiring perpetual and ultimately parabolic increases in debt simply to continue to exist

Hmm...  this is not true.

All fiat currencies PAIRED WITH fractional reserve banking are as you describe.  However, a fiat currency need not be paired to fractional reserve banking.  (clearly they all are at this time).  admittedly, it is unlikely that  our overlords can ever use fiat without eventulaly pairing it to debt.

also: there seem to be two over-arching rules in the currency universe

rule #1:  all fiat eventually goes to zero, to be replaced with either an asset-backed currency or another fiat.

rule #2: all gold/silver/metal-based economies eventually go to fiat.

snowball777's picture

At this point we're mostly concerned with back-up power for the morgue's AC system.

Ghordius's picture

Quintus, only because the ECB is fondling the gun, oiling it, putting bullets in and going trough the loading sequence does not mean the Euro is dead.

Yet. It's what might happen that could kill it.

InvalidID's picture


 The Euro will be kept floating and Greece will be in limbo until the US debt ceiling is raised and a lot of the short term US debt comes due. At such time the Euro will be allowed to implode, resulting in a 'flight to safety' where the US will be able to borrow a ton of money at below inflation. You heard it here first, now play the game accordingly.

Thomas's picture

Curious, some of the things Timmy G is considering to get us past August 2 might be construed as defaults too.

hamurobby's picture

Comon Trichet, its okay,


Internet Tough Guy's picture

There is only one way to recapitalize the system, and it is coming: Freegold.

Jovil's picture

Just look at how your assets fare in John Exter's Inverted Pyramid of Assets


CrashisOptimistic's picture

Guys, I am telling you.  These details are the equivalent of walking into a parole board meeting, being stopped at the door, and being told there is no budget to keep the criminal in jail.  

You can listen closely and analyse the parole board questions and responses and obsess over the details, but the outcome is already decided, and it is that they are going to bail out Greece.  It doesn't matter how or the mechanism.

They are terrified of swaps and even more conventional contatgion.  They will never allow default.  They will all write checks and GIFT it to Greece if that's what is required.

The details truly don't matter.

Internet Tough Guy's picture

FOA: "My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)"

Ghordius's picture

As far as I understood FOA and FOFOA they refer to the Weimar & the Zimbabwe Hyperinflation. If history would have to repeat for the EUR, then we are at least five years before the end.

And I don't see a black market for currency yet, it needs at least two years of that, before the end.

Panafrican Funktron Robot's picture

Sure you do.  That black market just happens to be gold and silver currency.

Ghordius's picture

Yes, we are seeing this with Greeks and Irish bank accounts. Because they fear their governments going back to own currencies. Yes, we see this with a few Germans.

But NO, at the moment there are even less currency restrictions in the Eurozone than in the seventies, and much less than in the USA.

Gold is being bought by Arabs, Indians and Chinese. We in the western world are not yet there.

disabledvet's picture

bitcoin.  that's your black market.  the irony that the government itself created the entity that allows it to be possible (the internet) should be lost on no one.

qussl3's picture

And the Greeks know it.

Problem is whether they can bluff the Spaniards and Irish.


SheepDog-One's picture

LOL hmmm lets see....theyve already tried to bail out Greece like 3 times in the last few months, last WEEKS 'bailout' already a spectacular fail, yet 'somehow, theyll bail it out'....sorry Im not buying it. 3 strikes and yer out, bitchez.

BTW forget the tiny Greece sideshow, how about the US debt crisis which has to raise a couple trillion in the next month or so? I dont care how much they may dislike defaults, fact is defaults loom no way around it.

GeneMarchbanks's picture

Enter Moodys. Rating goes to D and... phase one is complete.

Phase 2(Bringing in the Drachma) to commence shortly. Stay tuned.... or not, it really doesn't matter at this point.

Ghordius's picture

This is starting to piss me off. So at the end at the barber shop they want an hair extension?

SheepDog-One's picture

LOL already Greece back in trouble....what a fucking clownshow!

WhOracle's picture

I could swear markets waited for me and my wife to come back from honeymoon to continue the show.

dracos_ghost's picture

Yeah, exactly what was the point of all the Greek austerity vote drama?

Unless it was just a shot across the bow from TPTB to reminder the Greek populace of their "station" in the order of things.

Ecoman11's picture

I hope I'm seeing this right

Portugese 10 Year Bond Up 13.847%

Ireland 10 year Bond Up 7.889% —



Quintus's picture

Scary numbers aren't they?  I'll bet Mr Trichet is so very glad he's retiring shortly.  He's probably praying that everything holds together until he's gone so the next Guy's name goes in the history books as the ECB chief under who's watch the Euro collapsed.

disabledvet's picture

you can say "Guy" alright.  Guy Fawkes.  "next ECB chairman."

the not so mighty maximiza's picture

Greece is like that ugly girl that keeps calling you and bothering you after that drunk mistake one nighter.

snowball777's picture

No offense, but we think you played the cryin' game with "Anna Koultouris".

EasterBunny's picture

So, the banks are suggesting the solutions which save them from any haircut on their own bond holdings. My view may be overly simplistic, but surely banks are amongst those investors who should be most capable of quantifying and avoiding (hedging) risks associated with bonds and other assets. Advising clients on asset allocation/exposure/risk is part of their business, but they appear to be so bad at it.... This makes no sense to me

topcallingtroll's picture

America haters blinded by rage don't realize that we are in pretty good shape compared to europe.  Our banks are leveraged 13 to 1.  Top European banks are levered 30 to 1 and more overconcentrated and monopolistic than USA banks.


Levered 30 to one on greek debt that is held at full value when it trades for a 50 percent discount on the market!


The dollar will do fine.  We are known as the reliable partner around the world, not the dithering europeans.  Even the eastern europeans have greater confidence in the USA than the dithering western europeans.  We were there for them when it counted.  They know who to count on in a crises


Character, behavio,r and certainty count.  The USA has it.  The ECU doesn't.  If the  ECB buys defaulted bonds there will be hell to pay by the market.

topcallingtroll's picture

I don't see too many eurosnobs anymore telling us how superior they are to us.  Where are you eurosnobs?  Please come back!