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