Rumor Has It That The Germans Are Starting To Consider Real World Solutions To The Greek Debt Dilemma – Restructuring, Exactly As We Anticipated!

Any who have carefully perused my Pan-European Sovereign Debt Crisis series
realizes that I have been stating the chances of a Grecian default are
very high indeed -Nearly mathematically guaranteed, in a nutshell. I
even went so far as to model various scenarios of the Grecian outcome,
and the only way that Greece was to have a viable debt to GDP ration was
to strategically restructure. See What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. On that note, it appears that the Germans have been reading my blog.

The NY Times reports: Greece Debt Buyback Has Its Supporters

FRANKFURT — Analysts welcomed talk
Wednesday that Greece might reduce its debt load by buying back its own
devalued bonds, even though a German government spokesman denied reports
that such a plan was in the works. Denials notwithstanding,
economists said a buyback would make a lot of sense and could be an
important step toward solving Europe’s sovereign debt crisis.

Greek bonds already trade on open
markets at a steep discount to their face value. If Greece bought back
the bonds with help from other euro-zone countries, the country would
not have to pay back the full amount of the debt when the bonds reach
maturity. “Ultimately it’s the return to some kind of stable
debt path that will provide the biggest turnaround in confidence,” Mr.
Cailloux said.

…The latest speculation about a Greek
restructuring was prompted by a report in the Die Zeit newspaper
Wednesday, as well as statements by two ministers of the Greek
government who said Tuesday that extending debt repayments would be a
good idea. The Greek government denied it was in talks with private creditors to restructure its debt, Bloomberg News reported.

Economists have long doubted that
Greece will ever be able to pay back all the money it has borrowed,
especially when its economy is shrinking and the interest rate the
country must pay to roll over old debt is skyrocketing. But
talk of a restructuring has been taboo among European leaders, who fear
that a default by a euro country could permanently undermine the
credibility of the common currency. Properly handled, a buyback
could bring Greek debt down to a manageable level while avoiding the
stigma of default. Unlike a default or mandatory restructuring, a
buyback would be optional. Investors could still choose to hang on to
their debt until it matured.

Initial market reaction was negative,
however. The yield, or effective interest rate, on Greek 10-year bonds
rose seven basis points to 11.36 percent, according to Bloomberg data. A
basis point is a hundredth of a percentage point. European
leaders are under intense pressure to put an end to a year of market
turmoil caused by investor doubts about the solvency of countries
including Greece, Ireland and Portugal. Policy makers have been
discussing ways to strengthen the European Financial Stability Facility,
or E.F.S.F., which is the centerpiece of a €750 billion, or $1 billion,
rescue package for distressed euro-zone countries.

… Erik Nielsen, chief European economist at Goldman Sachs,
speculated that the E.F.S.F. could buy discounted Greek bonds on the
open market, then later re-sell the bonds to Greece. The E.F.S.F. would
attach conditions to ensure that Greece continued to reform its economy
and cut government spending.

“The possibility for the E.F.S.F. to
start buying debt in the secondary market is indeed on the agenda,” Mr.
Nielsen said in a note Wednesday.

I’m not a fixed income specialist, or anything like that, but if
traders recognize that the Europeans are willing to throw good money
after bad and buy these bonds in bulk, wouldn’t they up the price that
they are willing to part with them for? Significantly above what the
fundamentals would support, I imagine.

“There are lots of remaining
outstanding issues to be sorted,” he added, “but I would be surprised if
it’s not included when the full package is revealed, probably in
March.”

Actually, I have a pretty good idea of what the plan would look like, and I will elaborate after this excerpt.

There are potential drawbacks to such
a plan. It would shift Greece’s liabilities from private investors to
other euro-zone countries, which would then have to ensure that Greece
followed through on reforms to make its economy more competitive. Mr.
Cailloux of R.B.S. said that such a plan would not be a solution for
Ireland or other overly indebted countries because their bonds do not
yet trade at a big enough markdown from the face value.

The plan might not work for Greece, either, if prices for its bonds rise or if not enough bond holders were willing to sell.

Trust me, the prices will rise, and there will be bondholders who
will hold out for more. They all know the ECB/E.F.S.F. have deep
pockets, or at least want to appear as if they do, so why not attempt to
bilk them for as much as possible? There probably cannot be a voluntary
purchase of debt and have the debt remain at highly depressed levels at
the same time. The exchange will have to be more or less forced, ex. a
restructuring. Here is a likely (and the most likely) scenario along the
lines of what is discussed in the times article above.

The first column represents where Greece stands now, basically neck
deep in the “you know what”. The right column is basically what the NY
Times has discussed, sans the idealistic notion that traders and
bondholders of the Greek will stand idly by while deep pocketed buyers
lift their distressed debt off of their hands at deeply discounted
prices knowing full well that the ECB/EFSF will be willing (or
compelled) to buy at much higher prices.

In a nutshell, the bond exchange program (which is basically what was
proposed in the NY Times article) will either have to have much steeper
haircuts involved in order to bring debt/GDP to a sustainable level or
considerably lower coupon payments will have to be in order – most
likely in conjunction with haircuts. Even at the point illustrated above
that renders debt to GDP at 100% or so, investors will take an average
37% blow to the chin. Since many of these investors are leveraged 10x to
40x in order to juice what they thought would be yields (see How Greece Killed Its Own Banks!) you can guess how well they will accept such a proposition.

Readers who wish to see further opinion on Greek restructuring should see What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates.
Professional and institutional subscribers can interact with the actual
haircut model, already populated with Greek debt inventory, here:

Greek Default Restructuring Scenario Analysis

Greek Default Restructuring Scenario Analysis with Sustainable Debt/GDP Limits and Haircuts

Comments

[hooligan2009]

lovely! germany exchanges 50 billion euros now to buy Greek debt priced at 50 in exchange for a promise by the Greeks to repay 100 billon at par in ten years. Yeah, that will work. NOT! the house (bond dealers) always wins!

[Freddie]

Greek bonds at 11.4%?  Wow. As worthless as The Ben Bernank's paper.  The Germans seem to be among the only responsible people left in the world.

[Browncoat79]

What do we need restructuring for here in Ireland? We can apparently just print 51 BILLION euros whenever we want, and say almost nothing about it, and it's cool with everyone, even our German peeps.

[irishlink]

So the more that the other PIGGS get into trouble the better chance that there will be a negotiated restructuring! Bring on the NEW stress tests, I'm sure we here in Ireland can oblige. We are known for our hospitality!!!

[topcallingtroll]

I know you would agree that it doesnt take a lot of smarts to figure this one out reggie. It just takes someone objective who is unafraid of logical conclusions. However it is very hard to go down that path reggie. A guy like u could have made a.lot of money schilling for the midget demon GG.

Yogi Berra's advice sounds simple but it is so hard in practice as to be impossible for most people....but you can see a lot just by looking.

[bugs_]

ve have vays of makink real vorld solutions to the greek debt dilemma

[Sudden Debt]

Already caculated in

I SAID IT FIRST!!!

[williambanzai7]

Or resuckering...

[JW n FL]

+++++++++++++++++++++++++++++++++++++++++

[JW n FL]

I will say again, Thank You Sir! You are Fantastic!

God Bless You and Yours as always Reggie, JW