As the Greek parliament supposedly votes on the introduction of CACs into the outstanding Greek government bonds (governed under Greek law), the Greek bond and credit derivative market has reacted strongly. The price for the basis package (buying the Greek bond and simultaneously buying credit protection on that bond) has jumped to six-month highs and Greek CDS has broken to 73% upfront (record highs). Prices of some GGBs are up today - driven by technical demand for bond-CDS basis traders and also demand for some of the more liquid UK-law bonds - but most are down with the short-end suffering the greatest losses. The bottom line is this shift in the CDS and bond market for Greece suggests a very high likelihood of a credit event 'trigger' in the not-too-distant future and while net notionals are manageable and collateralized, there is always gap days (like today) which mean big cash needs for collateral managers and the unknowable impact of the daisy-chain of gross notionals to worry about.
The day dawns with a deal for Greece that is full of smoke and mirrors; lies and deceptions. It is a deal pretty much as expected and, as I have said before, now the realities are going to be confronted. Europe has spun the agreement and the Euro has rallied some and the S&P futures are up but the next few weeks, I am afraid, will hold some serious disappointments. The page turns today because now we are about to confront not what is told to us but the actuality of what has been presented to us and just what will happen as a result.
Think this time around finally the Greek deal is done? Think again. OpenEurope lists the "many" questions still surrounding the second Greek bailout that remain unanswered. We would add that this is hardly an exhaustive list, and believe the key question, to put it simply, is a CAC is a MAC? Because if the answer is yes, the deal is off.
Heading into the North American open, equities are trading lower with the benchmark EU volatility index up 1.6%, with financials underperforming on concerns that the latest Greek bailout deal will need to be revised yet again. Officials said that the deal will require Greece’s private creditors to take a deeper write-down on the face value of their EUR 200bln in holdings than first agreed. The haircut on the face value of privately held Greek debt will now be over 53%. As a result of the measures adopted, the creditors now assume that Greece’s gross debt will fall to just over 120% of GDP by 2020, from around 164% currently, according to the officials. However as noted by analysts at the Troika in their latest debt sustainability report - “…there are notable risks. Given the high prospective level and share of senior debt, the prospects for Greece to be able to return to the market in the years following the end of the new program are uncertain and require more analysis”. Still, Bunds are down and a touch steeper in 2/10s under moderately light volume, while bond yield spreads around Europe are tighter.
Depending on what yield you apply to the new Greek bonds, then the package is worth 21.5% to 26.25%. Since bonds are trading with accrued and accrued will be paid in 6 months, the real question comes down to what you believe is the value of these new bonds. If there is an amortization schedule, that would change the valuation positively... We still haven’t seen retroactive CAC clauses implemented, but assuming that they are, I’m not sure why the Troika would accept a 95% rate and not trigger, but it seems worth taking the risk. The ECB swap may be illegal. The retroactive CAC may be illegal. The Troika seems like it wants to pretend there is no default if at all possible, in spite of the write-down of more than 50% of the debt.
- Spiegel: Stop the 130-billion bank transfer! (Spiegel)
- Greece Wins Bailout as Europe Chooses Aid Over Default (Bloomberg)
- Greek pro-bailout parties at all-time low, poll shows (Reuters)
- Eurozone agrees €130bn Greek bail-out (FT)
- Top Banks in EU Rush for Safety (WSJ)
- Medvedev Adviser Says Kudrin Would Be Better Prime Minister (Bloomberg)
- US and Mexico in landmark oil deal (FT)
- McCain calls for US to support Syria rebels (FT)
- Coal Shipments to India Overtaking China on Fuel Shortage (Bloomberg)
- Gillard Shrugs Off Ousting Threat (WSJ)
Goldman's Greek Deal Summary: Increased Likelihood Of CDS Trigger And CAC Use Will Lead To VolatilitySubmitted by Tyler Durden on 02/21/2012 - 07:25
While we await for Thomas Stolper to issue his latest flip flop and to go long the EURUSD again ("tactically", not "strategically"), here is Francesco Garzarelli's take on the Greek bailout.Here is the biggest issue: "Increased likelihood of CDS: Moreover, higher losses inflicted on the private sector, involving the likely activation of CACs and the triggering of CDS, represent sources of near-term volatility." Bingo. Now as we pointed out in the previous post, a "successful" and completely undefined PSI program is a key precondition to the program. However, with bondholders now certain to throw up, and the requisite 75% (forget 95%) acceptance threshold unlike to be reached, will the use of Collective Action Clauses, and thus a CDS trigger constitute a PSI failure, and thus deal breach? In other words, since we now know that the March 20 bond payment will be part of the PSI, is last night's farce merely a way to avoid giving Greece a bridge loan, and putting its fate in the hands of creditors, which as we noted back in January is a lose-lose strategy?
Below are the main points agreed to by Greece to re-secure the €130b bailout, first agreed upon in July 2011, courtesy of Bloomberg.
Those who have been correct about the crisis in recent years question whether a new Greek government will stick to the deeply unpopular program after elections due in April and believe Athens could again fall behind in implementation, prompting lenders to pull the plug once the eurozone has stronger financial firewalls in place. The much used phrase "kicking the can down the road" underestimates the risks being created by European and international policy makers. Some have rightly warned that we will likely soon run out of road. Rather than "kicking the can down the road" what politicians in Europe, in the U.S. and internationally are actually doing is "kicking a giant beer keg down the road". The giant beer keg is the continual resort to cheap money in the form of ultra loose monetary policies, QE1, QE2, QE3 etc, money printing and electronic money creation on a scale never seen before in history. The road is our modern international financial and monetary system. The risk is that attempting to kick the giant beer keg down the road will lead to many broken feet and a destroyed road. A European, US, Japanese and increasingly global debt crisis will not be solved by creating more debt and making taxpayers pay odious debts incurred through massively irresponsible lending practices of international banks. The likelihood of continuing massive liquidity injections by the ECB next week and in the coming weeks will help keep the opportunity cost of holding bullion the lowest it has ever been and likely contribute to higher bullion prices especially in euro terms in the coming months.
You read headlines that Greece is saved (in a carbon copy release from July 21). Now read the truth behind the lies - presenting the 9 page (so it's brief enough) Greek sustainability (or lack thereof) analysis.
Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved, Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 100 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.
The FT's Peter Spiegel has scoped up some additional details from the 10 page debt sustainability analysis that is at the basis of the latest Greek bailout talks. Some of the critical details:
- "even under the most optimistic scenario, the austerity measures being imposed on Athens risk a recession so deep that Greece will not be able to climb out of the debt hole over the course of the new €170bn bail-out."
- A German-led group of creditor countries – including the Netherlands and Finland – has expressed extreme reluctance since they received the report about the advisability of allowing the second rescue to go through.
- A “tailored downside scenario” prepared for eurozone leaders in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 – far below the target of 120 per cent set by the International Monetary Fund
- Under such a scenario, Greece would need about €245bn in bail-out aid, nearly twice the €136bn under the “baseline” projections.
- “Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said, a clear reference to the possibility that bail-out funds may be needed indefinitely.
- Even in best case scenario country will need at least €50 billion on top of €136 billion.
- A recapitalisation of the Greek banking sector, which originally was projected to cost €30bn, will now cost €50bn. A highly touted Greek privatisation plan, which originally hoped to raise €50bn, will now be delayed by five years and bring in only €30bn by the end of the decade.
Translated, this is yet another confirmation of what we have claimed all along - that Germany is no longer playing along.
Update 3: Conference begins now
Update 2: At this point the conference, if at all, will be held at 3:30 am CET. Probably would be better to just scrap it all, put a fork in Greece and go home. The second the 10 page Greek "sustainability" report hits the public it's lights out.
Update: 23:00 CET has come and gone. Next stop: midnight. As a reminder, the October 2011 official second Greek bailout announcement was delayed until 4 am.
According to a just released update on the website of the European Council, the much anticipated press conference "to end all press conferences" will take place at 23:00 CET, or 5 pm Eastern. What will then likely happen is another delay until midnight, then later, then finally when Europe is sleeping a few finance ministers will say that the Deal is virtually done, the terms of the PSI are agreed upon (except that "some" creditors, those who have a blocking stake, will vote no and force the use of CACs and thus trigger a default before March 20) with the exception of a few minor outstanding items, such as whose debt is cut to bring total Debt/GDP to 120% by 2020, which they hope to get resolved shortly. And so this latest and greatest meeting will come and go, and anyone who shorted the Belgian caterers will be broke when the market opens up tomorrow, when Belgian catering ETFs all go limit up.