The Fairy Tale

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From Mark Grant, author of Out Of The Box

The Fairy Tale

Eurogroup Statement on Greece
                                                                            
The Eurogroup recalls that a full staff-level agreement has been reached between Greece and the Troika on updated programme conditionality and that, according to the Troika, Greece has implemented all agreed prior actions.
                                                                             
The Eurogroup in particular welcomes the updated assessment of the Troika that Greece has implemented in a satisfactory manner a wide ranging set of reforms, as well as the budget for 2013 and an ambitious medium term fiscal strategy 2013-16.
                                                                            
The Eurogroup noted with satisfaction that the updated programme conditionality includes the adoption by Greece of new instruments to enhance the implementation of the programme, notably by means of correction mechanisms to safeguard the achievement of both fiscal and privatisation targets, and by stronger budgeting and monitoring rules. Greece has also significantly strengthened the segregated account for debt servicing. Greece will transfer all privatizations revenues, the targeted primary surpluses as well as 30% of the excess primary surplus to this account, to meet debt service payment on a quarterly forward-looking basis. Greece will also increase transparency and provide full ex ante and ex post information to the EFSF/ESM on transactions on the segregated account.
                                                                              
The Eurogroup again commended the authorities for their demonstrated strong commitment to the adjustment programme and reiterated its appreciation for the efforts made by the Greek citizens. The Eurogroup noted that the outlook for the sustainability of Greek government debt has worsened compared to March 2012 when the second programme was concluded, mainly on account of a deteriorated macro-economic situation and delays in programme implementation.
                                                                            
The Eurogroup considered that the necessary revision in the fiscal targets and the implied postponement of a primary surplus target of 4.5% of GDP from 2014 to 2016 calls for a broader concept of debt sustainability encompassing lower debt levels in the medium term, smoothing of the current financing hump after 2020 and easing of its financing.
                                                                           
The Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.
                                                                            
The Eurogroup considers that, in recapitalising Greek banks, liability management exercises should be conducted in respect of remaining subordinated debt holders so as to ensure a fair burden sharing. Against this background and after having been reassured of the authorities' resolve to carry the fiscal and structural reform momentum forward and with a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:
                                                                              
• A lowering by 100 bps of the interest rate charged to Greece on the loans provided in the context of the Greek Loan Facility. Member States under a full financial assistance programme are not required to participate in the lowering of the GLF interest rates for the period in which they receive themselves financial assistance.
                                                                              
• A lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans.
                                                                               
• An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years. These measures will not affect the creditworthiness of EFSF, which is fully backed by the guarantees from Member States.
                                                                              
• A commitment by Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance.
                                                                            
The Eurogroup stresses, however, that the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the programme period as well as in the post-programme surveillance period. The Eurogroup is confident that, jointly, the above-mentioned initiatives by Greece and the other euro area Member States would bring Greece's public debt back on a sustainable path throughout this and the next decade and will facilitate a gradual return to market financing. Euro area Member States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme, in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%.
                                                                              
As was stated by the Eurogroup on 21 February 2012, we are committed to providing adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.
                                                                            
The Eurogroup concludes that the necessary elements are now in place for Member States to launch the relevant national procedures required for the approval of the next EFSF disbursement, which amounts to EUR 43.7 bn. EUR 10.6 bn for budgetary financing and EUR 23.8 bn in EFSF bonds earmarked for bank recapitalisation will be paid out in December. The disbursement of the remaining amount will be made in three sub-tranches during the first quarter of 2013, linked to the implementation of the MoU milestones (including the implementation of the agreed tax reform by January) to be agreed by the Troika.
                                                                            
The Eurogroup expects to be in a position to formally decide on the disbursement by 13 December, subject to the completion of these national procedures and following a review of the outcome of a possible debt buy-back operation by Greece. 

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There is no deal here. There is a fantasy of projections and some wishful thinking but no deal. There is not even an agreement on disbursement as codified in the last paragraph. The odds on Greece reaching a primary surplus in the next several years are about 1 degree off of Kelvin's Absolute Zero. The deferral of interest payments and the extension of the loans have some meaning but are nowhere close to bridging the deficit gap. All of this of course has to go back to the nations' Parliaments and it may not be as readily accepted as some hope. There is not even a definitive agreement yet to give Greece more money. The debt buy-back is governed under British law and while they are once again going after the private sector bondholders there is no CAC to enforce any action though there is the obvious falsification of prior claims that "it will never happen again." What we have here are more promises, a concocted ruse and an agreement on a concept that is actually no deal at all. I would also say that Mr. Draghi lost a good deal of credibility tonight touting this statement as an agreement that would "reduce uncertainty." Ms. Lagarde's statement: “The initiatives include Greek debt buybacks, return of Securities Market Programme (SMP) profits to Greece, reduction of Greek Loan Facility (GLF) interest rates, significant extension of GLF and European Financial Stability Facility (EFSF) maturities, and the deferral of EFSF interest rate payments." is also factually incorrect as these are "maybe" proposals for the most part as stated in the EU official pronouncement. What we have here is one more "huff and puff" and no agreement by any definition that I would find acceptable.
 
[Written and published on 11/26 at 19:59]
 

Let us do some further examination this morning. Here is the statement upon which the foundation of the projections rest and upon which disbursements will be made:
 
“Greece will transfer all privatizations revenues, the targeted primary surpluses as well as 30% of the excess primary surplus to this account, to meet debt service payment on a quarterly forward-looking basis.”
 
To date there have been almost no privatization revenues even though they have been promised for three years. Why will the next year be any different; it won’t. Next they speak of primary surpluses as if they were something that might be attained. None have been attained in the last three years, the economy of Greece has been doing nothing and will do nothing except to deteriorate further and yet the Eurogroup is telling children’s fairy tales and expecting us to believe in them that primary surpluses are to be forthcoming. Then they go past the fairy tale and enter the land of make-believe where they depend upon “30% of the excess primary surplus” to make a budget upon which the EU and the IMF will fund. Frankly, it is insulting that they think we are that stupid and devoid of common sense that we will accept this sort of delusional argument. Perhaps it is a throwback to the German playbook of the 1940’s where propaganda was a mainstay of the State but it is an insulting tactic for any person with half a brain.
 
The Rip-Off
 
“The Eurogroup was informed that Greece is considering certain debt reduction measures in the near future, which may involve public debt tender purchases of the various categories of sovereign obligations. If this is the route chosen, any tender or exchange prices are expected to be no higher than those at the close on Friday, 23 November 2012.”
 
We were told, we were assured, we were given solemn oaths by virtually every politician in Europe that the first write down of Greek sovereign debt by private investors was a one-time event and a one-off event that would only apply to Greece. So much for the solemn oaths of Europe!  Europe is now back trying to coerce private owners of Greek debt to sell their debt back to the country so that the Greek debt load can be decreased. This is exactly the reason why, beyond a trade or a hedge fund foray that the European Union cannot be trusted and why I am so negative about European credits. If the EU’s word is no good here why will it be good for any other country or any other situation? If the rules can be changed along with the political climate then the legal basis for the sovereign debt in Europe is grounded in in political expediency and not the Rule of Law and so the obvious should be recognized. 
 
Subordinated Debt Holders
 
“The Eurogroup considers that, in recapitalising Greek banks, liability management exercises should be conducted in respect of remaining subordinated debt holders so as to ensure a fair burden sharing. Against this background and after having been reassured of the authorities' resolve to carry the fiscal and structural reform momentum forward and with a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:”
 
Here it is obvious that subordinated holders of Greek bank debt are to be punished. The EU “may” recapitalize the Greek banks but only “after” the sub debt bond holders take a loss. Here is one more example of the disdain that private bond holders are held by the European Union. What may be worse is that other banks, even American banks with stand-by letters of credit or derivative contracts or repo agreements may be forced to take losses prior to recapitalization.
 
Maybe and Maybe Not
 
• A lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans.
                                                                               
• An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years. These measures will not affect the creditworthiness of EFSF, which is fully backed by the guarantees from Member States.
                                                                              
• A commitment by Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance.”
 
Here is monetary transference where some nations such as Spain and Italy will lend money to Greece at a cost less than their borrowing cost in the open markets. Also take into account the preceding paragraph where the EU agreement states: “the euro area Member States would be prepared to consider the following initiatives:” This is not a deal or a real commitment but a conditional notion that is squarely based in “maybe” and so it could also be “maybe not.”
 
Further Assistance Based Upon Dreams
 
“Euro area Member States will consider further measures and assistance, including inter alia lower co-financing in structural funds and/or further interest rate reduction of the Greek Loan Facility, if necessary, for achieving a further credible and sustainable reduction of Greek debt-to-GDP ratio, when Greece reaches an annual primary surplus, as envisaged in the current MoU, conditional on full implementation of all conditions contained in the programme, in order to ensure that by the end of the IMF programme in 2016, Greece can reach a debt-to-GDP ratio in that year of 175% and in 2020 of 124% of GDP, and in 2022 a debt-to-GDP ratio substantially lower than 110%.”
 
This is touted like it is attainable and possible. This is nothing short of a fantasy and yet is presented as if it might happen. The European numbers do not include $90 billion in derivatives, bank debt guaranteed by the nation, corporate debt guaranteed by the country, obligations to the EU and the ECB and a host of other obligations to the private sector that have to be paid whether Greece and the EU counts them or not. The IMF has not had one, not one, realistic projection for Greece during the last three years and they continue on with their record for accuracy today. In fact Europe is going to hand Greece more money in December but it is one more loan, the addition of debt and so, once again, Europe has folded because no one will take the hit and because everyone is frightened of what happens if Greece faces up to reality and so the Greek problems worsens and the eventuality of a collapse increases.
 
The IMF
 
No funds are going to be distributed now. Perhaps some of you missed this but this is exactly what Ms. Lagarde stated. Before any distribution the Eurozone has to “fulfill its commitments” and the Private Sector bond buyback plan must be completed. Consider this; Europe is putting up all of the money currently and the IMF has declined to participate. Oh yes, it is couched in political mishmash and tucked neatly under the rug but there it is; no money from the IMF for now.
 

Sustainable Solution:                                      None
 
IMF Current Participation:                               None
 
Upfront Money Provided by Europe:                 Yes
 
Conditionality for More Money:                        Yes
 
Realistic Assumptions:                                    None