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Sarkozy, Berlusconi And Trichet Deal Suckered Merkel Into Greek Bailout On Terms So Secret Austria Has No Clue What Is Expected Of It

Tyler Durden's picture


Days into the latest round of European bailouts we finally start to get a glimpse of the scrambling within the EU's top ranks over the past week to avoid the imminent Greek collapse this Monday. According to Handelsblatt, France and Italy had worked out a deal with Trichet first and subsequently advised Merkel that they would go ahead on their own. Merkel who had held out for a 6% interest rate on European subsidy loans was consequently forced to participate in the "syndicate" as Germany has the most to lose from a Greek situation spiralling out of control due to its banking system exposure, yet whose population is the one most vocal against a full blown bailout. The next question: what are the actual details of the subsidy debt's role in the capital structure, as well as the actual cash disbursement mechanism remain unanswered. Here are some thoughts.

More from the German paper:

Germany, supported by Austria and the Netherlands, insisted that Greece would only be allowed to borrow money at 6 to 6.5 percent market rates. Other countries, which found 4.5 percent more reasonable, moved quickly. Government leaders got on the phone. “Who didn’t I speak to?” was the rhetorical question the Luxembourgian prime minister Jean-Claude Juncker asked on Sunday afternoon, after he had finalized the deal in a teleconference call with all the finance ministers. “Everyone was calling everybody,” he said.”

Sounds just like the Lehman weekend as confirmed by recently declassified phone logs.

“Between phone calls, the French and Italian presidents met face to face. They worked out a deal with ECB chairman Jean-Claude Trichet that would entail Greece paying around 5 percent interest over bilateral loans from all other European countries. This is higher than the rate the ‘super strict’ IMF usually charges, but far less than the interest Greece was paying by the end of last week. Sarkozy and Berlusconi did not want to wait any longer for the Germans who, they feared, wouldn’t start showing some leniency until May, after the German regional elections, which chancellor Angela Merkel intends to win. Merkel also objected to the 16 euro zone countries taking a decision, and kept insisting all 27 EU member states got involved. The French and Italians reportedly agreed that they could be first to offer Greece loans, granting Merkel some more time. Merkel thus lost the initiative she had held in the Greek bail-out debate for months. It wasn’t until Sarkozy, Berlusconi and Trichet sealed their secret deal on Thursday night that she understood the gig was up, and she dropped her demand for a 6 percent interest rate. To offer Merkel a graceful exit, Juncker talked down the importance of the 5 percent interest rate on Sunday, calling it “anything but a subsidy”. After all, there are a lot of Greek state bonds sitting in German banks. And Germany will have to fork over the biggest loan because of the size of its economy, if the Greeks ask for it.”

How anyone can assume that taking a loss of over 250 bps to market rates is not a subsidy is beyond us. What is interesting is that one week into the bailout, nobody has any clues as to what the structural subordination of the "subsidy" bonds will look like - will they be pari with existing debt, or senior? Will there thus be a tiering of sovereign debt in those cases where the IMF is involved? And judging by the IMF scramble to boost its NAB to $550 billion, we may be seeing a whole lot of junior sovereign debt soon.

What is truly hilarious, is indicative of just how clueless all those in the EU are, and shows just how little thought has gone into this most recent version of the bailout, we read now that the "Austria Debt Agency Has No Details Yet On Greece Contribution." Loaded guns everywhere, and nobody daring to ask if the bullets are just blank.

From Market News:

Austria’s debt agency has not yet received any details on how the country’s contribution to a Greek backstop loan would be drawn by Athens, Martha Oberndorfer, managing director of the agency (AFFA), told Market News International Tuesday afternoon.

Oberndorfer confirmed that Austria’s maximum contribution is E858 million and “how we fund it, will depend on the tenor.”
On the home front, Oberndorfer said there are “no details to be disclosed so far” about Austria’s second syndicated RAGB bond issue this year. “We will have a clearer picture in the second half of May,” she said.

The debt chief also confirmed that Austria has so far raised E10.6 billion in 2010, which includes a new 7-year benchmark issue for E4 billion sold in January.

Austria, which borrows under the name of Republic of Austria and is rated Aaa/AAA/AAA by Moody’s, Standard & Poor’s and Fitch Ratings Agency, is planning to sell between E21.0 and E25.0 billion worth of bonds in 2010, which is lower than the E33.0 billion issued last year, due to lower redemptions.

It is quite obvious that Austria has no details to disclose because there are, well, no details to be disclosed: the latest bailout was just merely more rhetoric all with the hopes that the actual bailout can be averted, in a repeat of what happened in February... and March. Alas, today's Greek bond action indicates that hope, unlike in America, does not work in Europe and the bailout mechanism, as Deutsche Bank said, will have to be activated by May.

As for the actual funding, here is who Goldman Sachs believes will be the sacrificial lamb in the country that wil be most on the hook for the bailout: German bank KfW, just as the bank was rumored two months ago to be preparing emergency loans for Greece.

How to fund financial aid for Greece? After the conditions for financial help have been specified, the German government still has to answer the question how to finance the German share of €8.4 billion. There is, not surprisingly, a preference for evading a parliamentary vote and a spokes person of the finance ministry said that loans and/or bond purchase through state-owned KfW bank would be the best way to proceed: "Everything we're considering is within the framework of law and order. I believe this is covered by the KfW's mandate. The government can ask KfW to carry out transactions on its orders". KfW plans to refinance, according to the finance ministry, between €70-75 billion this year and a potential Greek bail-out would not lead to additional financing requirements. Meanwhile, the fiscal expert of the SPD Carsten Schneider warned that funding costs for Germany could increase as a consequence of the help for Greece. And, yes, most of the German press is pretty critical on the deal.

At this point continuing to hold long Bund positions may be hazardous to one's health, as the peripheral flight to safety ceases, and investors focus on what the weakest link in the current situation is - namely Germany itself. This will be especially true once Germany's people are heard and disclose their full "endorsement" of Merkel's recent subsidy actions.

h/t Econotwist


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Tue, 04/13/2010 - 15:02 | Link to Comment Overpowered By Funk
Overpowered By Funk's picture

Hmmm. The French and Italians vs. the Germans and the Austrians - looks like everything'll be just fine!

Tue, 04/13/2010 - 15:17 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

The global debt is so enormous that Germany will be looking for its own bailout.  

It's just a matter of time that a cocktail of 450 trillion in derivatives, oil  peak problems, Iranian nuclear threats, Israeli paranoia and American bankster arrogance will explode.

Poor Greece is just a starter stick


Andes anyone?


Tue, 04/13/2010 - 15:09 | Link to Comment Gimp
Gimp's picture

EU = More bureaucrats than the USSR in their heyday.

Ultimate goal - everyone works for the government = USSR.

Tue, 04/13/2010 - 15:10 | Link to Comment Mad Max
Mad Max's picture

Italy had money to proffer for bailing out Greece?!?!?!?!

Oh, and it looks like shady backroom deals and throwing good money after bad happens on both sides of the Atlantic, now at least.

Tue, 04/13/2010 - 15:26 | Link to Comment Oracle of Kypseli
Oracle of Kypseli's picture

The italians will pay in liretta

Tue, 04/13/2010 - 17:02 | Link to Comment tmosley
tmosley's picture

Or in seized "fake" US bonds.

Tue, 04/13/2010 - 15:14 | Link to Comment SDRII
SDRII's picture

iran offers a solution for the capcity glut..

Tue, 04/13/2010 - 16:28 | Link to Comment Augustus
Augustus's picture

That is simply all Crazy Talk, entirely Crazy talk.

Chewblamya has given assurances that the Iranians would never do anything such as that.  The ccertainty of those announcements must mean that it has some source close to the decision makers.

Tue, 04/13/2010 - 15:12 | Link to Comment Mongo
Mongo's picture

Time to wake up and smell the ashes. Germany should do the only right think and drop the Euro and start printing some Deutche Marks again.

Tue, 04/13/2010 - 15:13 | Link to Comment sweet ebony diamond
sweet ebony diamond's picture
Sarkozy, Berlusconi And Trichet Deal Suckered...

no slime-bags here.

Tue, 04/13/2010 - 15:14 | Link to Comment George the baby...
George the baby crusher's picture

Sounds just like the Lehman weekend as confirmed by recently declassified phone logs.

Nice observation.

Tue, 04/13/2010 - 15:17 | Link to Comment carbonmutant
carbonmutant's picture

I wonder who's going to administer this bailout?


Tue, 04/13/2010 - 15:19 | Link to Comment bugs_
bugs_'s picture


Tue, 04/13/2010 - 15:20 | Link to Comment ZackAttack
ZackAttack's picture

Hopefully, the German voters, unlike US citizens, will actually show a sack and expunge Merkel.

Tue, 04/13/2010 - 15:22 | Link to Comment buzzsaw99
buzzsaw99's picture

merkel the circle jerkle.

Tue, 04/13/2010 - 15:26 | Link to Comment Shameful
Shameful's picture

Good, glad to know that secret deals that no one has read is standard operating procedure worldwide.  I really need Merkel to say "I was elected to lead, not to read!".  After all our congress critters will vote on bills none of them have read.

Tue, 04/13/2010 - 15:28 | Link to Comment kaiserhoff
kaiserhoff's picture

     Come on Tyler.  It's worth 70 billion to get the Greeks off center stage.  They're an embarrassment to the species.  On the other hand, this looks more and more like Lehman redux.  Those in charge don't have a clue.

     Greece is just comic relief.  The real deal is the mob of choosy beggars lined up from here to Tierre del Fuego.  Couldn't happen to a nicer bunch of coconuts.  Just one question.  When the shit storm hits, where do I sign up for my FEMA trailer???  

Tue, 04/13/2010 - 21:57 | Link to Comment masterinchancery
masterinchancery's picture

Buy your own trailer, Kaiser!  Maybe you can get a subprime loan.

Tue, 04/13/2010 - 15:38 | Link to Comment SgtShaftoe
SgtShaftoe's picture

We are seeing the beginning of the end of a united Europe, or the beginning of something else, a la Taleb's 4th Quadrant:

We're watching history folks!

Tue, 04/13/2010 - 15:40 | Link to Comment ZackAttack
ZackAttack's picture

Spain and Italy should break ground quickly on some extremely expensive public works projects.

Tue, 04/13/2010 - 15:41 | Link to Comment yabs
yabs's picture

if this bailout goes ahead then sarkozy will

be guillotined in no time. The French will not take that, that is assured. Germany should just let the banks take the hit in a controlled bailout

how does anyone think that they will be get the money back anyway?

Greece is a black hole. There is no loan, only gifts. Italy as well? They are not that much better off. Will Greece then loan back the bailout? what an absurd mess

Tue, 04/13/2010 - 16:57 | Link to Comment dark pools of soros
dark pools of soros's picture

i keep seeing those scenes in The Wire of 'the greek' and at the end he always says.. 'I'm not even Greek!'

Who even KNOWS what the Greece books say..  they could just be sitting on the cash or buying gold and hiding it and then asking for more money to default on...

Tue, 04/13/2010 - 23:42 | Link to Comment gecko_x2
gecko_x2's picture


according to this balance sheet as of Dec 31 2009,

Gold and gold receivables rose from 2,924,754,323 EUR in 31.12.2008 to 3,633,315,395 EUR in 31.12.2009

Tue, 04/13/2010 - 15:42 | Link to Comment Hansel
Hansel's picture

If all the EU contries and all the countries on the IMF NAB list plan on issuing debt to fund the bailouts, who is going to buy the debt?  Ponzi!

Tue, 04/13/2010 - 15:43 | Link to Comment anony
anony's picture

"All that's left of old men (and a woman) are their dirty little secrets".

Tue, 04/13/2010 - 15:59 | Link to Comment ignorant
ignorant's picture

must admit,  since sunday all greeks programming how to spend the bailout money - summer is coming and need vacations :) 

Tue, 04/13/2010 - 16:32 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Zero hedge needs to separate the utility of money from its debt component .

The Greek Government clearly needs money to function - if the government and Greek nation begins to fail then the economic consequences of that failure would be far higher.

I am sure that France and Germany will suffer a loss of revenue from this subsidy but while they need the peripheral of Europe to take the heat of the economic inferno they realise that to lose more then one of its EU states would be potentially catastrophic.

There also seems to be elements within the EU structure that want to weaken states to the point of irrelevance by starving the creation of base money to the advantage of credit money but I believe they could be gravely mistaken in this new era of deglobalisation.

The irony of this grave situation is that governments subsidy of failed market participants (Banks) has now created a almost unstoppable clash of power between these two groups although large sections of the political class fail to see this as they have outsourced political decision making to these malcontents for generations.

Money will have to be destroyed , the question is will the base money of governments be destroyed to sustain banks capital or will the opposite occur.

Clearly if states fail the banks will fall unless bankers can overcome the dependency on state institutions to sustain their existence.

Tue, 04/13/2010 - 22:05 | Link to Comment aus_punter
aus_punter's picture

Can't say I disagree with your opinion that the consequences of a state failure are large, however, this isn't necessarily a situation perpetuated by banks , this is a situation perpetuated by governments living beyond their means and committing fraud. 

Given that the loans are said to be bilateral in nature then surely it is up to the citizens of each member state to decide (via referendum or otherwise) whether these loans / gifts get aportioned or not. 

The Eu bureaucrats seem to think it's their money .....they will soon work out that it isn't.  When the Austrian taxpayer works out that his or her tax Euro's are being gifted to the Greek state  rather than being spent upon their own wellbeing do you think a gift will be forthcoming ?

Default seems inevitable

Tue, 04/13/2010 - 22:17 | Link to Comment THE DORK OF CORK
THE DORK OF CORK's picture

Parhaps the Greek situation is special given the fact that they had large fiscal deficits before the crisis but I still believe that Greece and other European states would not now face a debt crisis if they destroyed the balance sheets of the European bank sector , this would have destroyed money within the system and reduced the debt load substantially both inside and amongst European states - a depression would follow for sure but now we will get both a depression and a threat to the currency of the area with its attendant problems of destabilisation and fracture

Tue, 04/13/2010 - 23:02 | Link to Comment aus_punter
aus_punter's picture

destroying bank balance sheets would take out huge ammounts of money in circulation and greatly increase the value of the remaining currency as deflation set in.... the debt crisis at the sovereign level would be there either way so I am not sure that argument works, though happy to be proven wrong.

Tue, 04/13/2010 - 16:10 | Link to Comment sangell
sangell's picture

Greece is more like Bear Stearns with the EU and IMF playing the role of JPM and the FED. Lehman will be the weekend Spain blows up.

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