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The Rating Agencies Have Now Been Silenced: Off Balance Sheet MLEC-Style Debt Rollover Plan Will Not Trigger Events Of Default

Tyler Durden's picture


A few days ago, when we explained that the current iteration of the European bailout plan is nothing but a repeat of the failed MLEC off-balance sheet plan, which was supposed to prevent the subprime bubble from exploding, we wondered just why Europe has settled on this plan. Now we know: it appears that it was the rating agencies, arguably well-padded with $100 bills to compensate their collective conscience, who suggested that this is the only format of perpetuating the global ponzi without Greece being declared an Event of Dafault. Per Reuters: "The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies." There it is: expect headlines to slowly start leaking from S&P et al that the MLEC part deux will actually not be an Event of Default, and so Europe has the all clear to continue kicking the can down the road for several more years courtesy of money that is literally created out of thin air, and pledged by assets that no longer generate virtually any cash flows.

From Reuters:

Politicians and bankers are confident a French proposal for a Greek bailout can be adopted without triggering a default or a payout in credit insurance, lifting a key hurdle to a rollover of Greek debt, sources told Reuters.

Banks have received positive signals from rating agencies that they will not call a French rollover plan for Greek debt a default, three people close to German lenders said on Wednesday.

"The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies," one of the people said.

Another source said the fact the French model was developed by banks implies the rollover will be fully voluntary -- a precondition for rating agencies not to declare a default.

"It is not rocket science for a lawyer to figure out that a debt exchange won't trigger a credit event," a derivatives expert with knowledge of the talks said.

"(The French plan) will be seen to comfortably not trigger the CDS," he added.

However, a senior official at Standard & Poor's on Monday said it was too soon to judge the ratings impact of the discussed debt relief package.

"I can tell you only that we cannot give a judgment on something we have not even seen," Moritz Kraemer, S&P's head of European sovereign ratings, had said.

French banks, who have some of the largest holdings of Greek sovereign debt, have proposed voluntarily renewing part of the bonds when they fall due, but on different terms.

That proposal is being discussed in Germany, too, and sources close to the talks said details such as the volume of any rollover and the coupon payments of new bonds need to be finalized.

Joseph Ackerman, whose asset base is 84% of Germany's GDP, summarized it best:

The head of German market leader Deutsche Bank (DBKGn.DE), Josef Ackermann, said on Wednesday the financial industry is prepared to agree to sacrifices because a Greek default would be more dramatic than the crisis at investment bank Lehman in 2008.

"The solution for Greece must avoid the collapse of the entire system," said Ackermann, while pointing out the German proposal for a voluntary rollover of Greek debt would lead to 45 percent writedowns on the bank's entire portfolio.

And there you have it: the global ponzi will now continue, courtesy of the infinitely expandable EFSF and MLEC 2, in the form of one giant CDO and one massive off balance sheet SPV conduit, precisely the two things that led to the cratering of the financial system in the first place.


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Wed, 06/29/2011 - 12:19 | 1412220 doomandbloom
doomandbloom's picture

we need  'Kicking the Can' as an Olympic sport...

Wed, 06/29/2011 - 12:23 | 1412272 lizzy36
lizzy36's picture

It is.

The difference is the prize is not a gold medal. But the assets of the loser Nation.

Wed, 06/29/2011 - 12:47 | 1412379 Broomer
Broomer's picture

Regarding gold Olympic medals (courtesy of Wikipedia):

The medals awarded after 1912 have been gilded silver and only contain about 6 grams of gold, therefore the term gold refers primarily to the medal's color and status, not primary metallic content. All Olympic medals must be at least 60mm in diameter and 3mm thick.


Wed, 06/29/2011 - 14:00 | 1412662 kito
kito's picture

actually you are wrong, since 1912, the winners were given u.s. treasury bonds. the medals were used only for ceremonial purposes.

Wed, 06/29/2011 - 13:16 | 1412519 Slartebartfast
Slartebartfast's picture

and so Europe has the all clear to continue kicking the can down the road for several more years 

Are you kidding?  How about kicking the can down the road for a few more months at best.  Probably just a few more weeks.  This ain't over baby!!

Wed, 06/29/2011 - 12:16 | 1412223 monopoly
monopoly's picture

So hard to short this market. There is no truth and a market that changes direction every day hard to trade.

Wed, 06/29/2011 - 12:19 | 1412248 augie
augie's picture

I've got the losses to prove it.

Wed, 06/29/2011 - 12:36 | 1412260 dcb
dcb's picture

you need a good chart, that's all. although, it's hard when the markets aren't moving with the technicals, which is happening now. when hourly moving down, but market going up it pises me off. I don't mind the going up as I bought longs on tht day when the futures were down so much. but what is going on now is a bit screwed, by all indications there should be some selling when the hourly money flow and macd are going down. with three up days the. this will be the end of the third day, so that gets eveyone buying

Wed, 06/29/2011 - 12:26 | 1412264 101 years and c...
101 years and counting's picture

for those with attention spans less than your average hft trade, ben stops printing money tomorrow....until the S&P is near 1100 and oil is under $80.


Wed, 06/29/2011 - 12:40 | 1412362 SheepDog-One
SheepDog-One's picture

We'll see how long the monster stands for not being fed.

Wed, 06/29/2011 - 12:21 | 1412236 chartcruzer
chartcruzer's picture

The global financial system (oligarchy) has one objective, keep control of the debt bubble and interest rate payments (ie, bank income).  Employ any tactic including accounting fraud and near fascist bleeding of a nation's citizens to sustain the income flow.

Behind the scenes are hundreds of trillions of derivatives (interest, currency, default) that trigger if the debt bubble seriously deflates (a bit like a global neutron bomb).   If interest rates in major countries like US/Germany/Japan/ etc. start to consistently rise, large countries/institutions default, or currencies blow up the global financial system will stop. The politicians know this, want to keep their jobs and thus, play to the banking oligarchy resulting in a global conspiracy supporting the "kick the can down the road" game.  This game will linger on far longer than anyone can imagine as the end game has consequences beyond imagination and the developed counties of the world are all playing along.

As more debt gets added to the debt bubble on a global basis the only way out (from a politicians point of view) is inflation which, will slowly but consistently devalue the debt load and avoid financial collapse.   Everyone in power knows this.     As a result take a look at the following graph which compares major asset prices to the price of gold long term.   The chart is a relative comparison of various assets (stocks, bonds, commodities) to the price of gold (that is, gold is represented by the 0% line on the graph).   Is there any wonder that precious metals are the overwhelmingly the best performing asset classes over the past decade?[s238082247]&disp=P

Of course, should the global financial/political oligarchy loose control of the debt bubble or the rate of inflation a currency crisis will result which, once again, places precious metals front and center as the investment of choice.

Fellow champions of truth, simply watch the major long term trends on interest rates and the value of major debt based currencies.   These are the "tell".

US dollar[s218820698]&disp=P



Interest Rates[s218718281]&disp=P

Be warned, virtually no fiat currency has ever survived a debt bubble like this.   As such I have little faith that that politicians will use long term inflation to stave off the deflation of the debt bubble.   But,,, that's conjecture......  To wit,  a bit of an anthology to ZH!


Wed, 06/29/2011 - 12:18 | 1412241 firstdivision
firstdivision's picture

Nice way to take a page out of the US MBS playbook.  Now Italian prop traders are planning their moving to Greece.

Wed, 06/29/2011 - 12:19 | 1412244 km4
km4's picture

Here's Why The US Is An Even Bigger Kleptocracy Than Greece


  1. The U.S. is truly a kleptocracy because its political leadership actually has no interest in limiting the banking/financial cartel.
  2. The rule of law in the U.S. has been divided into two branches: one in name only for the financial Elites and corporate cartels, and one for the rest of us mere citizens.
  3. Just as in Greece, taxes are optional for the nation's financial Elites.









Wed, 06/29/2011 - 12:29 | 1412287 topcallingtroll
topcallingtroll's picture

The usa is bigger for sure. Probably not more kleptocratic. We dont have the high level of tax evasion that the greeks have. 90 percent of backyard pools are undocumented and 90 percent of doctors other professionals and politicians report euro incomes less than 12000 per year from recent zero hedge posts.

We are getting there! Be patient with us!

Wed, 06/29/2011 - 12:20 | 1412247 oogs66
oogs66's picture

All good again until the next crack opens up Probably tomorrow

Wed, 06/29/2011 - 12:24 | 1412254 NotApplicable
NotApplicable's picture

There will be no defaults. Everything will be papered over, and over, and over...

Wed, 06/29/2011 - 12:47 | 1412377 SheepDog-One
SheepDog-One's picture

There may be no 'defaults', there will also be no jobs, no paychecks, no savings, no gubment checks, no retirement funds. SHTF is in the eye of the beholder, just depends on where youre standing at the time.

Wed, 06/29/2011 - 13:18 | 1412524 cranky-old-geezer
cranky-old-geezer's picture


I've been saying this over and over, there will be no defaults.

Maturing debt wiil be rolled into new larger debt. 

Central banks will print and print and print, buying up more and more and more debt, until currencies collapse and commodities skyrocket.

Sure, people can make nominal profits in paper along the way ...while the currency steadily loses value.   Then currency collapse will be sudden, unforseen, overnight, instantly wiping out those nominal profits.

Wed, 06/29/2011 - 12:25 | 1412256 Manthong
Manthong's picture

Depends on what the meaning of the word "default" defaults to.

Wed, 06/29/2011 - 12:24 | 1412279 NotApplicable
NotApplicable's picture

It will have no meaning, but rather be defined out of existence.

Wed, 06/29/2011 - 15:26 | 1412932 PhD
PhD's picture

Hence, in the not too distant future, an "event of default" is defined to refer to the following:

  • Actual default: the failure to pay principal or interest when it falls due for payment, due to the will of God.
  • Prospective default: when payment is not yet due, but it is clear that it will not be capable of being paid when it falls due, due to the will of God.

The occurrence of either event, but which is not due to the will of God, is not an "event of default", rather it is an "event of non-fulfillment".

To distinguish between the "events of default" and the "events of non-fulfillment" the counsel of God will be established, a council consisting of the men known to be performing the work of God

Wed, 06/29/2011 - 12:25 | 1412257 topcallingtroll
topcallingtroll's picture

The terms are fairly good.

I can see why it wont be declared a default. It is a good deal for bindholders. Not a good deal for greece.

Wed, 06/29/2011 - 12:25 | 1412259 AnAnonymous
AnAnonymous's picture

The most interesting part in this crisis is how the West is indulging itself in any kind of loophole possible to avoid facing reality.

Wont do good with all the other countries that did not have the same opportunities and were fried.

Power matters and in this US world order, it matters a lot.

Wed, 06/29/2011 - 12:22 | 1412261 Greeny
Greeny's picture

Tell ya many times, TRADE WHAT YOU SEE and what you hear or

believe or think. Market going higher, bobos, place your bets.

Wed, 06/29/2011 - 12:49 | 1412387 SheepDog-One
SheepDog-One's picture

Youre full of shit, and like Robo I doubt you 'trade' a damn thing at all.

Wed, 06/29/2011 - 12:29 | 1412262 carbonmutant
carbonmutant's picture

Tom Sawyer and Huck Finn would be proud of this job...


Wed, 06/29/2011 - 12:23 | 1412268 NotApplicable
NotApplicable's picture

Oh, and in other news, Hoenig tells the world that the sky is blue (or that TBTF undermines capitalism). World says, 'meh, whateva.'

Wed, 06/29/2011 - 12:24 | 1412280 jmcadg
jmcadg's picture

The can will only travel for three more months, when Greece defaults again. Then what?

That's if the Greek people haven't lynched the fuckers beforehand.

Wed, 06/29/2011 - 12:29 | 1412285 Atomizer
Atomizer's picture

the global ponzi will now continue, courtesy of the infinitely expandable EFSF and MLEC 2, in the form of one giant CDO and one massive off balance sheet SPV conduit, precisely the two things that led to the cratering of the financial system in the first place.

It will be different this time around, they've learned from their mistakes.


Wed, 06/29/2011 - 12:31 | 1412309 lizzy36
lizzy36's picture

The did learn from their mistakes. VERY WELL. Bailouts will be handed out everytime someone invokes LEH2.0. EVERYTIME.

Buy yourself a team of congresspeople. Add in some bench strength from the lobbyists. And VOILA you have a successful business model.

The only thing anyone cares about is keeping the capital markets alive. The MEANS always JUSTIFIES that end.

Wed, 06/29/2011 - 12:25 | 1412286 lizzy36
lizzy36's picture

According to DJ they just attacked a Greek MP in the streets.

Wake me when this happens in yankville.

Wed, 06/29/2011 - 12:29 | 1412302 Greeny
Greeny's picture

F*ck them, who cares now, votes has been passed,

Now, that's Police problem, in Russia they

would end this M f*ckers march in less than 1 hour..

Gotta place few punks behind bars for 5-10 years, that's it.

Wed, 06/29/2011 - 12:34 | 1412304 Cognitive Dissonance
Cognitive Dissonance's picture

Did they happen to check how the MP voted before bringing out the tar and feathers? I mean it would only be fair. Ya don't want to change a NO to a YES for Thursday......would ya?

Wed, 06/29/2011 - 12:31 | 1412293 skistroni
skistroni's picture

All your loans are belong to us.

And your money too long time. 

Next time you will need to "save" us you will not, because you will be too busy saving yourselves. 

And then we will be free.

Wed, 06/29/2011 - 12:36 | 1412346 Caviar Emptor
Caviar Emptor's picture

Tip: Make sure you have a little "debt problem" again soon before there's nothing left

Wed, 06/29/2011 - 12:34 | 1412307 Franken_Stein
Franken_Stein's picture


The global ponzi scheme is run under one slogan:


"Annuit coeptis novo ordo seclorum."


Wed, 06/29/2011 - 12:43 | 1412359 Caviar Emptor
Caviar Emptor's picture

Ponzi ite domum 

Wed, 06/29/2011 - 13:28 | 1412562 I_ate_the_crow
I_ate_the_crow's picture

         WAR IS PEACE



Wed, 06/29/2011 - 12:31 | 1412311 carbonmutant
carbonmutant's picture

The people of Greece are now a Camel on which the entire EU rests.

Political cartoons to follow...

Wed, 06/29/2011 - 12:35 | 1412316 Caviar Emptor
Caviar Emptor's picture

What a relief! And here I was sweating and pacing, worried to death that the bailouts might end and we'd be relegated to living in a world where money is made the old fashioned way. 

Thank you banksters! Thank you overlords! 

Now let's go out in force and shop till we drop and win one more for the gypper. 

Wed, 06/29/2011 - 12:36 | 1412319 DonutBoy
DonutBoy's picture

The search for leadership continues to no avail.  Some countries will lose democracy this way.

It's funny how the end of the sovereign debt bubble is being refereed by the completely discredited rating agencies.  It's huge billboard with flashing lights signalling trouble.  These outfits,  having proven themselves to be craven and without principle, are the arbiters of the value of trillions of dollars of financial contracts and the future of governments.

By the people for the people...  Not so much


Wed, 06/29/2011 - 12:42 | 1412354 Joebloinvestor
Joebloinvestor's picture

If a Greek default brings down the "system" I would suggest that it wasn't a very good system to begin with.

What the politicians are afraid of is a Greek default and the "doom and gloom" scenario not materializing and the world just keeps on spinning away.

Then the "fear factor" won't work anymore.

Wed, 06/29/2011 - 12:45 | 1412367 AnAnonymous
AnAnonymous's picture

Very possible.

Wed, 06/29/2011 - 12:40 | 1412358 lizzy36
lizzy36's picture

Whoever runs through all these comments and junks them, Mazel Tov.

Nothing says brilliance like junking all and engaging in debate with none.

Wed, 06/29/2011 - 13:18 | 1412510 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

There must be a way to ban people who engage in compulsive junking?

Wed, 06/29/2011 - 12:40 | 1412361 centerline
centerline's picture

We know the hot potato was going to be tossed back to the US at some point.  Seems a little early though.  I think first we see some sparks from a few more PIIGS.  Then the toss back here just in time for a debt ceiling showdown.

Plus, we all know there needs to be much more pain in order to justify QE3.0 (Op Twist or whatever).   There was a Fed guy on NPR the other day actually who said the additional measures would likely come only if the Fed lost its autonomy (was forced).  I thought that summed up the game plan perfectly.  The politicians and people will take the blame for what happens after the next round of "easing."  There just needs to be enough suffering (or enough of a scare) for a grab onto the printing press lever by someone other than BB.

Wed, 06/29/2011 - 12:48 | 1412384 Hondo
Hondo's picture

There they go again screwing the investors....this is clearly a default, the greek economy is in ruins and there is no way with or without austerity that they can ever meet their we will find for the second time that the EU is perfectly fine with greece lying about their economic performance.

Wed, 06/29/2011 - 12:50 | 1412409 Highrev
Highrev's picture


Wed, 06/29/2011 - 13:02 | 1412461 augie
augie's picture

are terrifying

Wed, 06/29/2011 - 13:11 | 1412497 hambone
hambone's picture

and freaky - some sort of legislation to resolve this would be a fine use of our representatives time...and potentially take their eye (and other sorted bits and pieces) off of screwing us for a moment?

Wed, 06/29/2011 - 14:16 | 1412739 oogs66
oogs66's picture


Wed, 06/29/2011 - 12:53 | 1412426 ForWhomTheTollBuilds
ForWhomTheTollBuilds's picture

So if I as an investor had bought Default Swaps to insure against Greek default back when the idea of default was laughable and "impossible", I would not get paid when their creditors take a 45% haircut on the debts Greece now cannot pay on the terms originally agreed to.


Is that about right?  


I guess I gotta ask, what is the precise definition of "default" anyway?  Do they have to change the definition to make this work, or was it always wide open to interpretation?

Wed, 06/29/2011 - 12:55 | 1412430 bullchit
bullchit's picture

How will greece stand in the EU when the army takes over?


Wed, 06/29/2011 - 13:09 | 1412484 statlawyer
statlawyer's picture

since the game is now completely rigged, this begs the question: why not short greek CDS since they will never pay out, and go long greek bonds as a pairs trade?

Wed, 06/29/2011 - 14:14 | 1412750 oogs66
oogs66's picture

Sell Greek CDs to buy CDs in Spain and italy

Wed, 06/29/2011 - 13:13 | 1412485 slewie the pi-rat
slewie the pi-rat's picture

even dagong will not cross the banksters' line on this piece0'crap. 

if there is anything positive coming out of this, it may be that we are, slowly but surely, starting to figure things out and beginning to recognize what we are seeing.

it is not mother's face, is it?

Wed, 06/29/2011 - 13:11 | 1412498 Franken_Stein
Franken_Stein's picture


Currently there's white smoke billowing on Syntagma square.


This either means "habemus papam" or in the case of Greece it's "habemus metropolitam".

Or, this is a TEPCO moment.


In either case: Don't panic !

At least that's what the Intergalactic Hitchhiker's Guide advises in cases like this.


Wed, 06/29/2011 - 13:34 | 1412588 earnulf
earnulf's picture

As long as you have your towel.    And remember, the population of Earth is now listed as "mostly harmless"

Wed, 06/29/2011 - 13:21 | 1412523 hambone
hambone's picture

Bond market paging Ben Bernanke...Ben Bernanke, you and your printer are being urgently requested to return to QEasing the market...

Wed, 06/29/2011 - 13:23 | 1412529 Franken_Stein
Franken_Stein's picture


Patient Greece dead on arrival.

Who cares.

Give him 200 mg of inoprovalin.


Wed, 06/29/2011 - 13:31 | 1412555 hambone
hambone's picture


Wed, 06/29/2011 - 13:19 | 1412528 Everybodys All ...
Everybodys All American's picture

Not so fast ... not every rating agency is buying off on this plan. It is a credit event and this show is not over by any stretch.

Wed, 06/29/2011 - 13:24 | 1412533 Kristian
Kristian's picture

Why are most messages here flagged as junk (national sport at ZH)?

This option seems rather redundant.

Wed, 06/29/2011 - 13:34 | 1412573 Troy Ounce
Troy Ounce's picture


Throw the rating whores in the ditch, they are useless in any case.

And if they make a mistake, they turn to the 1st amendment (free speech).

Wed, 06/29/2011 - 13:35 | 1412579 GoldbugVariation
GoldbugVariation's picture

A lot of Greek government debt needs every holder to consent to adjustment of the terms before it is deemed voluntary and so not a default.  (Other debt has class voting or majority voting of creditors.)  Because some of the holders are hedge funds or other difficult customers, that is hard to obtain.

The French bank proposal appears to be a voluntary refinancing by the major EU bank holders.  Even that, will only be possible if all major holders agree - otherwise it's unfair on the ones who are out will benefit at the cost of the ones who are in.  There's a lot of politicking and manoeuvring involved, the French banks may talk the talk, but it's not obvious that all holders are going to walk the walk.

Wed, 06/29/2011 - 14:16 | 1412760 oogs66
oogs66's picture

No they can't be forced to rollover

Wed, 06/29/2011 - 13:43 | 1412616 CPL
CPL's picture

These idiots are begging for their entire family tree to be wiped off the planet.  On a side note the new owners of Canada and the previous owners of the US are visiting Ottawa tommorrow, Will and Kate, the British Dirt Pile of Royality..

Wed, 06/29/2011 - 13:48 | 1412628 CPL
CPL's picture

aka the shallow end of the Hapsburg gene pool...there's a fucking reason the half wit king had a speech impediment...fuck your sisters and cousins long enough...

Wed, 06/29/2011 - 13:56 | 1412664 Franken_Stein
Franken_Stein's picture


In Greece little children when they want to go to the toilet don't say "A-a" to their mommies, instead they say "alpha-alpha". ;-)


Wed, 06/29/2011 - 14:01 | 1412680 Franken_Stein
Franken_Stein's picture


The general strike will certainly be prolonged to one week.


Wed, 06/29/2011 - 14:42 | 1412839 DNB-sore
DNB-sore's picture

So the banks and rating agencies make a deal and politicians are getting a woody? Wonder how the Europarlement is going to explain that; "the financial system takes the lead solving our problems"

Wed, 06/29/2011 - 14:57 | 1412913 SwingForce
SwingForce's picture

Who are the idiots BUYING these credit default swaps? Don't they know the governments will never let them collect? Its a waste of money to buy CDS don'tcha know....

Wed, 06/29/2011 - 14:55 | 1412920 cdskiller
cdskiller's picture

Wow. I wish everyone could read and understand what Tyler synthesized in this piece. It's irrefutable and astonishing. The desperate belly of a Ponzi, eviscerated.

Wed, 06/29/2011 - 18:31 | 1413644 Buck Johnson
Buck Johnson's picture

For Deutchbank to take a 45% writeoff or downgrade on their investments in order to keep the game going is telling.  They are being told if Greece goes down the whole of Europes banking institutions will go with it in short order.

Wed, 06/29/2011 - 18:37 | 1413667 tom
tom's picture

If I understand right, the French proposal is for the EFSF to guarantee 70% of the value of the new Greek bonds, and for the remaining 30% to be collateralized with set aside cash. This isn't yet being talked about openly but it's alluded to in the footnotes of the proposal text that's floating around.

If so, that would mean that for banks rolling over into these bonds their only Greek exposure would be the coupon (5.5 to 8%). Trading short term Greek principal and coupon exposure for long-term Greek coupon exposure and German principal exposure would be a good deal for the banks, so of course ratings agencies would consider this uncoerced. After all banks wrote the proposal.

The question is can they sneak it through. I don't think Europeans are being told that they will be on the hook for 70% of the principal of these bonds. It's a stealth bailout by permanent fiscal transfer labeled as a guarantee.

Thu, 06/30/2011 - 04:31 | 1414739 supermaxedout
supermaxedout's picture

Who are the idiots BUYING these credit default swaps? Don't they know the governments will never let them collect? Its a waste of money to buy CDS don'tcha know...


Yes now its obvious. The CDS markets are just as worthless as the MBS. This market is now completely dead too. 

Can not imagine somebody with a healthy brain is still carrying his often hard earned money to WallStreet except he is a masochist.  

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