Wolfgang Munchau On How The Greek Rollover "Deal" Is A Toxic CDO

Tyler Durden's picture

A week ago, Zero Hedge penned "An MLEC In PIIGS' Clothing: The Latest Greek Bailout Proposal Picks Up Where the Super SIV Failed" in which we explained how the current fatally flawed proposal for a Greek bailout is nothing more than a structured vehicle, expected to remain off the books, and much more importantly, expected to not trigger rating agency ire, and kill the entire extend and pretend game: remember - an Event of Default by a rating agency, even a Technical one (completely irrelevant of what ISDA does with Greek CDS) means game over for the European Central Bank and its €2 trillion in "assets", not to mention the western financial system. Now, a week later, the FT's own Wolfgang Munchau explains why our observation of how toxic the "bailout plan" is was rather accurate: "This structure is still not quite so complex as some of the more elaborate CDOs we have encountered in the global financial crisis. If you take some time to work through the arrows and boxes, you see relatively quickly that this complex structure is not a private sector participation at all. Rather it is a private sector bail-out... I have no space for a large drawing with lots of boxes and arrows to explain the complexity of the vehicle, through which eurozone governments want to involve the private-sector banks in its next loan package." Munchau's conclusion: "If this was any other field of human activity, you would go to jail if you accepted, let alone made such an indecent offer." On the other hand, all is fair in love and perpetuating the ponzi Status QuoTM. Our follow-on observation that "The two things that are keeping the Eurozone afloat: an SPV and a CDO" alas appears also to be rather in line. And before the entire financial system collapses upon itself like a cheap lawnchair, this will be fondly remembered as one of the more prudent "rescue" mechanisms enacted to delay the inevitable.

And inevitable it is:

It is also inevitable that Greece will default on its coupon payment at some point. The interest will be 8 per cent under a benign growth scenario, and 5.5 per cent under a not so benign one. Either way, Greece cannot pay such a high level of interest.

Here is how the CDO looks like graphically:

Munchau gives more details:

So here is my best attempt in words: if you own a Greek bond that matures by June 2014, you keep 30 per cent of the redemption as cash, and roll over 70 per cent into a 30-year Greek government bond. The Greeks will have to pay an annual coupon, or interest rate, of between 5.5 per cent and 8 per cent. The precise rate will depend on future economic growth.

Of the money received, Greece will lend on 30 per cent to a special purpose vehicle, another well-known construction from the subprime mortgage crisis. The SPV invests into AAA-rated government or agency bonds, and issues a 30-year zero coupon bond. The purpose of this is to guarantee the principal of the 30-year Greek government bond that you just bought.

With this construction, the downside to your losses is limited. Depending on how some of the parameters of this agreement evolve, you will probably make a small loss, relative to the par value of your holding. If you are lucky, you might come out positive. You will probably not be lucky. But you will still be better off than if you sold today, or if Greece were to default. More important, the accounting rules allow you to pretend that you are not making any losses at all.

The punchline is not surprising, but it is funny:

The rollover agreement represents, from an economic point of view, nothing but a collateralised bond. It subordinates all other bondholders. The rating agencies would normally not hesitate to attach a default rating to Greek government debt.

So the solution is to create a complex structure, and claim that it is technically not a collateralised bond, but something that defies definition.

As for Greece, which as even Juncker now agrees it is game over, they have all the cards in their pocket:

Just why the Greeks would want to accept such a ruinous deal is not clear to me. They did their duty last week when they voted for the austerity programme and its implementation law.

The acceptance of the terms of this private sector participation agreement was never part of the agreement with the European Union and the International Monetary Fund. They could therefore simply refuse, and throw the ball back to Europe’s squabbling finance ministers. I doubt they will do this. They seem scared about the consequences of an immediate default.

Nevertheless, once the treacherous nature of this contraption is fully understood, I would expect the politics of crisis resolution in Greece to become even more difficult, and accident-prone.

The MLEC did not work for Subprime. It will not work here either. But whatever can buy a few days or weeks of no volume levitation for the market while the insiders and smarter hedge funds cash out to the biggest grenade holders will work for the time being. And when that fails, some other insanely idiotic idea will be proposed... and swallowed hook like and sinker by a market which is getting depressingly dumber by the minute, although explainably so: everyone is on the same side of the boat once again.

If anyone dares to point out that the ponzi viceroy of the world is naked, it's all over.

h/t London Dude Trader

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Spitzer's picture

US money markets are into Greek debt. Enough said, money will be printed.

ISEEIT's picture

Okay. I'm still on this. Getting weak though, feeling tired. Still covering my short Eur.

Fuck me right?

I won't quit. I'll die first and that is a timeline thing.

Orly's picture

Wait for the AUDUSD to double-top @~ 1.10 before doubling down.


JW n FL's picture

1. http://www.youtube.com/watch?v=wYuLjGQQ-jg there is not enough energy to go around, LET ME REALLY DUMB IT DOWN!! There is not enough cheap Energy to go around. It is not that we are out of oil, the problem is that we have Peaked in Global Production of Lite Sweet Crude. Thusly energy now costs $200bbl a barrel.


2. http://blogs.forbes.com/beltway/2011/02/14/intelligence-community-fears-u-s-manufacturing-decline/ 50,000 jobs a month since the year 2000.. have been moved off shore and to china.. and we Paid Corporations to Undermine the Tax Base??????????????????? We Paid Corporations to Undermine our own work force????????????????? This was good for America how?


Now that you know what the problems are you can continue to sit on your ass and do exactly nothing about fixing them. (not directed at you Orly.)

Popo's picture

It doesn't take an economist to see that there are unpayable debts here,  and cards are simply being shuffled while debts remain unpaid.

No number of accounting tricks will make Humpty Dumpty whole again.

Ghordius's picture

Remember that some of the debt is "unpayable" since the 1960's. This has been true for Greece, of the Euro periphery, for the UK and for the US. The question is not if the debt is payable, the question is "can you pay the interest?". Roughly, a country can decrease it's debt at a rate of 1% per year. It just implies having a better-then-balanced budget, which needs some political will beyond "vote for me, I'll spread the goodies". There is this new meme going around that if debt is unpayable, then it's odious. It's not the way this game has been played in the last decades. And long before, this kind of talk brought you some gunboats at your coast, as a friendly reminder. This might only change if the biggest players changes this pattern. The Greek have the options, one of them is some sort of default (they don't have the nerve yet). And to be fair, you have to give a sovereign state some time for this kind of decision. France had a similar problem with unsustainable credit and railroads in the region of Syria & Lebanon over a century ago. Notice how Germany & France are pursuing two different strategies: German Banks are recognizing (against their will) losses now, the French are "kicking the can", courtesy of the IMF.

For me, it looks like EUR/USD will be around 1.40 at the end of the year. Yes, I know, it's optimistic at many levels.

oogs66's picture

I think he is wrong...he has the SPV construct wrong.  this is still closer to what is going on....



Milestones's picture

Boy oh boy! Why not try to teach a 3 year old how to ride a 10 speed over the Silverton to Durango road in December. Rots of Ruck!     Milestones

Tejano's picture

Give it a rest. And, for a change of pace, try Matt Ridley, "The Rational Optimist".


Sabibaby's picture

I would suggest Red Mountain Pass instead.

GoldmanSux's picture

Tyler, would love to see a month by month bar chart of Euro bond maturities for Portugal, Spain, and especially Italy. All roads lead to Rome.

Ghordius's picture

In this case, all roads end in Rome.

GoldmanSux, if you stick to a Domino theory, then Italian Debt is the very last in the list. You need a French Banking System panic first. And a serious default by Spain before that.

hack3434's picture

Oh gawd...ABX-HE-BBB all over! What a nightmare...

lizzy36's picture

Well if you missed the first nightmare, you can double down on this one.


eureka's picture

RE: "an Event of Default by a rating agency, even a Technical one (completely irrelevant of what ISDA does with Greek CDS) means game over for the European Central Bank and its €2 trillion in "assets", not to mention the western financial system."

WHAT? When Greece defaults (eventually) it's "game over for ECB" - ???

You must be kidding. REF. MAX KEISER: US banks will suffer more than European banks - because US banks have insured all the European banks' Greek garbage loans.

chump666's picture

It's all about the ECB, with a  balance sheet that could collapse if PIIGS default one by one.  There is a WSJ out there (now) talking about it.

The ECB is gigantic risk engine that may f*** EZ to pieces.  If they print oil inflation takes out German and French, but they have to finance the insolvent banks of Europe.  Total FUBAR coming. Increase rates, they push the PIIGS into a depression. The greeks are never going to be able to cover the interest rate...ever.  PLus the partial default has probably already happened.


chump666's picture

EUR down...S&P comments, anyone gettng this?

chump666's picture

8% interest payment...bet the Greek people sending a early default to the French and German's, an indefinite strike.

PulauHantu29's picture

I have a Funny feeling that Gold is going to soar to $5,000 this year after all my  reading this week.

dark pools of soros's picture

Boxes & Arrows Bitchezzz

  ########                      #########

 # was yours #  >>>>>>>> # now mine #

  ########                      #########

Herbert_guthrie's picture

Everything today is becoming like a toxic CDO.

Cursive's picture


Everything today is becoming like a toxic CDO.

Word.  The money's no good.  Our most fundamental financial instrument, our medium of exchange, has been sacrificed so that the monied interests can stay solvent.  And a special recognition to FASB for throwing all credibility under a funeral pyre to help things along.  Sad times for integrity.

DavidC's picture

My reoollection is that FASB was TOLD by Congress to initiate the 'mark to fiction' - if it didn't then Congress would make it law. Also, FASB went back to Congress a couple of months ago to recind the 'mark to fiction' and was told by Congress 'NO, it stays in place'.

Is this correct?


Cursive's picture


I remember Congress did a little saber rattling on the issue, but so what? Here we are on the anniversary of one of the greatest moments in the history of freedom, when a few mercantilists, lawyers and farmers told the world's greatest till-then power to fuck off and you want me to absolve FASB of fraud because some members of Congress suggested it. This world is so full of pussy that the air I breathe wreaks of day old tuna.

chump666's picture

Two way folks Italian (Greece style) + China/HK (hardlanding) = red

Rally is about to snap to a sell off from hell

Atomizer's picture

Your going to see Italy and Spain exercise the Greece IMF program. Kicking the can/fraud down the road.. All is well under MSM reporting. Meanwhile, currency debasement lives on.



chump666's picture

Not for much longer, the interest payment will never happen, market kinda working that out now, hence Italy news coming up.  Heng Seng bank now talking China/HK slowdown after last weeks Asia crappy PMI's.

My bet.  Bearish signal on the AUD, price closing low (1hr chart) for the 2nd time Asia session, commodity index looking bearish etc.  Stocks are in la la land at the moment.  Topped out rally...it's going down

ebworthen's picture


Did someone say the Emperor is naked?


Itsalie's picture

Why would the Greeks take this toxic deal? Because so far, the eurocrats and yankees have decided always to bail out their own banks, and the Greeks are alwasy able to extort some money (50% this time) from them. Greece will just pretend to implement more austerity than now, fix up more demonstrations and let their fiscal hole become worse, which will mean there will be a next round of bailout next year (eg they default on that 5.5% interest on those 30 year bonds). Maybe next year, Ireland or Portugal may join the show, or maybe Spain or Italy too. So take all the money you can squeeze out of the taxpayers of Germany and yankee land, and wait for Germany to eject itself out of the euro, probably sometime in 2013 when the global bond market implodes and Germany is crushed by its debt burden from its "emperor no clothes" guarantees, and China's SoEs and zillionaires are declared bankrupt and finally stop importing audis and german machines. When that happens, Greece will enjoy the massive devaluation as the euro finally finds its fair value of parity against the toilet paper. And the world will have too many other problems to worry about and forget theis tiny pieces of rocks in the Med Club.

Tuffmug's picture

Clever Greeks! They have the EU pigs over a barrel and squealing. 

midnight's picture

wtf do you KNOW about what is going on in Portugal, Ireland, Spain or Italy?

hardcleareye's picture

If you disagree with the opinions of the poster than explain the errors of their "ways".... your comment, as expressed, serves no purpose.

time123's picture

As long as the rating agencies do not go wild, the U.S. stock market will do well. Time to get bulish again!



admin at http://invetrics.com

Yen Cross's picture

 Credit Default Swaps. Lets see how the Tuesday open works. Bunds vs T's

bentaxle's picture

China will bailout the downside limited losses. They promised and the guy was smiling, not grinning, when he said it so he must have been genuine.

theprofromdover's picture

On the one hand, G.Pap and his pals will promise anything for the cash today.

On the other hand, they aren't patriots, so don't really care what happens so long as their personal stash is safe in Switzerland.

On the third hand, Barroso, Trichet, everyone in Brussels is blinded by their beautiful USofE vision, whatever the cost.

On the fourth hand, until Italy and Spain trip over, this is just going to carry on until completely FUBAR (as if it isn't now)

On the fifth hand, they are all playing with fire, at some point even the people see there is no rule of law and no justice any more.

This time it ain't different, we are back in the 18th Century now. Everything has happened many times before, we just fool ourselves into thinking we are more sophisticated now. Dream on, for one of these tomorrows coming soon, enough people will wake up and see the robber barons for what they are.

gwar5's picture

This latest installment of the Greek bailout was just another EU theft and recapture of Greek sovereignty and national assets that weren't on the line in the last bailout.

This is a naked banker NWO coup.

midnight's picture

The garbage coming from ZH posters has reached a new record. What the hell do you know about Spain, Italy or Ireland?

Popo's picture

You mean besides that their banks are insolvent?  And their sovereign debts are unpayable?

... well .. I guess,  one could add that the food is decent (except for Ireland)... and that their chicks are extremely hot until the age of around 27 and then turn into fat grandmothers with disturbing speed...





Spastica Rex's picture

Keep posting this if it makes you feel better.

Version 7's picture

Nazis don't know either. F*ck off.