80%+ Immediate Downside To Par For New Greek "Fresh Start" Bonds
One of the funny things about the proposed Greek debt exchange offer is that, at least according to most recent fluid rumor, the cash coupon ceiling on the "post reorg" bonds, as dictated by the European finance ministers, will be 4% (hedge funds want more). So let's assume 3.5% for argument's sake. Perhaps the fact that the cash coupon of the US 30 Year note is roughly the same is somewhat concerning, because call us skeptical but Greek credit quality may be just a little worse than that of America - something which should be obvious to most. Except for European leaders of course. But that's fine - one can define cash coupons to be anything. After all the only thing that matters for bonds is yield, which Greece appears to have forgotten is determined by coupon and price. So since the Greek Debt/GDP will still be over 120% according to another set of rumors (after all, only a small portion of the country's debt is really getting impaired), it is 100% safe to say that in 30 years Greece will still go bankrupt. So let's say it deserves a comparable yield to its current 30 year bonds, which are priced to yield about 23%. We are being a little generous and estimate the fresh start bonds will yield 20% post break. Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par.
One can probably see why the hedge funds would be a little leery of converting existing claims into new paper which will immediately implode, especially since by doing so they relinquish all rights to sue Greece. If anyone thinks hedge funds wouldn't rather take their chance in court where they could potentially recoup up to par of the pre-petition bonds, we have a bridge from Athens to Santorini to sell you. And more importantly, if anyone is aware of a way to short these fresh-start bonds in advance of break, synthetically or otherwise, please let us know.
Source: BBG YASC
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Bullish!
The anti-Stolper ETF is pleased to announce an imminent high. Like I said before, I am not shorting EUR/USD again until 1.35--what with all this UEBER-BULLISH news a comin in.
platinum been jumpin....gooooooo convergence
Its just the paper platinum,not the platinum platinum. Carry on...
I dont suppose i need to tell anyone that actually knows bond math and understands what the current yield curve in Greece reflects, that this analysis is yet again one of those hastily done bearish flash headlines that we also hate from the media. I wish Tyler would stick to just letting the facts, which are bad enough, play out and stay away from this specious and fallacious proofs.
For those who care, you cannot use 23% yield on the 30 year anymore than you can use 140% yields on the current short end of the bond curve in Greece. If you buy any of these Greek bonds, the reality is you will get significantly less than PAR back due to the imminent restructuring. Hence these yields of 23% do not reflect and would not reflect new credit bonds in Greece unless under a similar imminent default. I would expect a yield at best case Ireland and worse case Portugal, so lets say around 7.5 to 12%.
Tyler knows full well that 20% assumption is not "generous" on his part, but downright unrealistic and purposefully misleading.
Stick to the facts, we will follow you anyway, even on the boring days...
I think that's the joke.
Phil, the new bonds will be, as the privately owned are now, subordinated to ECB and IMF obligations, and most likely subordinated to internal Greek debt. Add a 30 yr maturity and a 3% coupon, a YTM of 7.5% to 12% is a pipe dream.
The Greek economy is in a free fall, a full blown depression. 120% debt to GDP will become at least 135%, if not higher. Remember, they have a deficit to GDP of over 8%, which isn't coming down anytime soon. AND the new bonds will still be subordinated.
Alex, all your points are true. It will be subordinate to ECB and IMF and yes Debt/GDP would be at 120% or higher. But, the 120% or higher includes ECB and IMF loans. So think of it as Senior and Junior tranches of that 120%. If it came issued at yields of 20% it implies imminent default. That means immediate restructuring. So it wont come out at those levels, cause it would mean the new bonds are as of day one resturcturing like the old ones.
That doesnt mean that in the future they cant yield 20%, the of course can. But Portgual currently has debt/GDP at 113%!. So it is not going to trade through Portugals long bond yields. That has to be the upper bound.
Phil, as this charade continues, the Senior tranche gets larger and larger, pushing down recovery value on the Juniors. Probably a better way to value the new bonds would be a NPV of the expected coupon payments plus a discount on the ECB rescue fund paper they will receive.
Remember, Portugal is currently in "compliance" and is not in danger of getting ECB and IMF funding cut. If their depression continues, they will be in the same boat.
Wait, so you would expect the 30 year yield on post-reorg Greek bonds to cap at 12.5% when the country will be broke again in 2 years (those 15% budget deficits don't magically go away as much as one wishes they do) and that's assuming tax-collectors actually stop striking and collect taxes, and the country's balance sheet will be further primed by another $100 billion DIP from the Troika in very short course?
There will be lots of selling to you then.
Tyler, both you and i know we are talking about 30 year bonds here, not 2 year bonds. So what is important is the recovery value given another restructuring. If the Recovery Value of the current debt restructuring is say 25%-30%. that woul;d mean that under the worst case scenario that they are issued with immediate default in the same year, they still would trade near 25. Given that Greece's Debt/GDP doesnt hit 120% till 2020, and Portugal's is already 113%, you would be hard press to show me values much north of 12-14% worse case.
The market actually can price what will happen in 2021. And the fact that by then the junior claims (the Post Petition 2042s that you will be bidding on at 12.5%) will be primed, and have recoveries slashed pro rata by the amount of incremental priming dip in addition to the existing Troika "bailout" funding. Also, we say an additional €100 billion because 15% deficits on €300bn for two years is just that.
Frankly, it is the DIP that likely will be impaired here soon (good luck exercising that lien on the Parthenon) when the market realizes what "recovery value" means when you can't airlift an entire country. Of course that does not matter as the Troika does not care about return of capital.
The point is that at best these bonds will be exchanged in yet another issue in 2 years with terms comparable to where the 30 trades now, assuming the country has not reverted to the Drachma by then (aka civil war).
(happy to model it out for you).
I will side step a lengthy debate because none of what i said is untrue and your side arguments are sound. However, what you said is new 30 yr bonds would trade about say 20. Which of course is Recovery Value or below. You are effectively saying then that new bonds will trade at a situation effectively worse than Argentina from day one.
Not comparing to Argentina. Just comparing to secular trends within the Greek economy. The only reason why investors would not think the country would default the day after the reorg is because Europe would not let it. The question then becomes what is the opportunity cost of German voters saying enough in the next elections and overturning this whole charade. At least in Argentina you did not have to worry about the German electorate. In this case you do.
So what is the current cash recovery thinking: Two years of a 4% coupon makes one whole (less at 3.5% of course) when added to a 15 cent EFSF bill (which everyone will dump at the same time meaning best price will be about 80 cents) if bought at 21? What if this is a Movie Gallery /MF Global and not one bond payment is made? A 30% loss off the bat. And the upside? 2-3 years tops before the next event. So 35% cash return in 3 years, which is what annualized?
Furthermore, since the IRR sensitivity analysis breaks down if cash coupon is lowered from 4% to 3.5%, this means that the next default is expected just after 2 years. What happens if it happens in 1 year? Or sooner?
Is that the best that the distressed elite can come up with (unless of course the Troika is sued successfully for fraudulent conveyance)?
Finally, define recovery value in sovereign terms? The worst case here is a free fall chapter 7 corp equivalent.
So how do you liquidate a sovereign?
Tax collectors? Half of the "working" population are unionized govt workers. Probably more than half.
They need to cut the govt "payroll", cut spending and raise taxes. Buffett is one who says if we only raise taxes - whilst he dodges paying his corp taxes.
Greece is like the Haiti, Detroit/Chicago of Europe. There is no fix.
Buffett is like the old mafia boss who lives in the little apartment and strolls by the fruit stand and buys an dapple once in a while. Most of the public sees him as a kindly grandfather figure, while he's busy robbing and pillaging behind closed doors
Sold to you at Irish yields in whatever size you want. Non ECB and IMF held debt is now officially subordinated!!! You will own new sub debt. And why is CDS is 65 bid for 5 years? Shouldn't that be a lot lower?
This spells instante Euro $1.40.
What a joke.
Yeow - better get some CDS to protect on those fresh start bonds... lolz
USA will buy Crete with all NATO bases and nuclear submarines, since Crete controls all Mediterranean.
Ok guys bid: How much does Crete cost: 4 tons of Gold? 6 tons of Gold?
Never have a financial device sound vaguely like a feminine hygeine product .
"Golly gee willekers Tammy, I need roller-skates to keep up with you! How do you do it?"
"Easy, I use shredded up Greek bond certificates. They are the most absorbent you can get."
"Fresh Starts", when you need a spritely feeling down there.
Move over Madison Ave, Slaughterer and Blank Reg, FTW!!
ROTFLMAO!!
Everytime they come with an idea, you guys find holes in it. sarc/
This is a good one. They should hire all Tylers and all Durdens and fix all problems easy peasy.
At least Tyler would be able to trick the market for more than a week.
Mommy, why does the cheese have holes in it?
Mitch Hedberg: 'Swiss cheese is my favorite kind of cheese because it is the only cheese you can take a bite of... and miss.' RIP Mitch.
That is because they are only thinking a week or two in advance now...its kick the can...not fix the problem....that will take years and work....and politicians have none of that....so haircut today...and then move on to Portugal...then Italy...france..Spain..whatever....then at some point..move back to Greece for more haircuts...defaults ..whatever...
perhaps if we called it "kick the road down the can"?
Or take the "can show" on the road?
Just frikkin flush the can down the turlet.
Easy as cake, when TPTB continually avoid the only real solutions, default or debt Jubilee!
The total and utter fools... Damn Bernanke and his swap lines papering over this thing and allowing this insanity to continue. Only when the US T-bond complex will finally be slaughtered by the market will we move towards resolving this BS. I am waiting with baited breath yt with interest rates swaps from ESF + QE holding down the yields along with Gold suppression these guys are really fighting the market forces hard...
It's working it's way up the food chain. No amount of printing can fix this.
You have to admire the Greeks' self-esteem.
You mean bluffing with a busted flush?
and the euro is still up....
... and gold is down. It's the perfectly illogical move we've all come to know and love.
USA and Greek credit yields are neck and neck at 3.5....more I think about it, that's a good price-in and must be considered bullish
Yes, but if you agree to the swap, you also get free Baklava for life!
Might as well issue 0s...as in coupon and chance of repayment.
+ for every billion youll get a nice t-shirt. Color an size free of choice.
http://www.printfection.com/greekbeermerchandise/Ringer-T-Shirt/_p_3196211
This analysis is just nonsense.
You replace garbage with garbage. There is no (new) loss to you.
I'd rather have high coupon garbage than low coupon garbage any day of the week.
Not true. If you do a voluntary exchange offer your CDS hedge is worthless. Read your ISDA...
If the guy hasn't read his ISDA by now...oh well
Reading isda is easier than war and peace but less likely to impress some chick
.
this is all getting boring. there will be no contagion. its overdiscussed.
Like the Avatar name, Wave 5.
For all those who are complaining that Greece is getting boring, look at this:
EU said to have no deadline for conclusion of Greek debt talks
\
HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHA!!!!!!
Somhow the plan must include laundering a big part of the issue through the already-insolvent banks for transfer to the ECB vaults, thereby generating more faux collateral for future rounds of ponzi. Fukkin genius !
4%?
Hedge Funds want to flush Greece out. Good. Short the CDS's and cover their long USD positions, short the EUR when the ECB prints 'officially' to rescue the EZ banks. T-minus and counting.
Why would any fund holding CDS on its position even consider this? The people running the show on this must be going Full Retard. If I have my downside covered by CDS and my upside consists of the nuisance value of my position, I would have to be committed to take any write down on my bond position below my trade equity in the CDS.
Stupid fucking bureaucrats...
Their only plan was to hatch a plan. They already know it's buffoon. The CDS paperholder's gotta worry about getting paid a dime from counterparties, no matter how this works out. I think the Greeks are bluffing, but it's a pretty good take-it-or-leave it bluff.
IIF is a joke
Copy...
The UK pound will be bid too...lucky English, their bonds will be also bid. See if Cameron has gamed the EU well, and that idiot French guy.
It's such a dirty game
BULLISHit....
you rang....?? Credit-Suisse pays its bonuses in derivatives
http://www.bloomberg.com/news/2012-01-23/credit-suisse-bonuses-to-include-bonds-created-from-derivatives-memo-says.html
after they implode, maybe Robo_T will recommend them for the conservative portfolios among us
risk-free return!
i think the hedgies hafta blow out everything and trigger the swaps, don't you?
yes. they don't get bailed out like investment banks.
so it's do or die.
How about ultimately providing some nice high yield PIIGS bonds for the sheeple of the world to live on? Like those nice Asian Tigers' junk bonds we had years ago.
So this means my sister with a 525 credit score and a minimum wage mall job should be able to get a 3.35% 30 year loan on a $200k home? Same deal I got with a $65k job and 785 credit score, awesome!!! I mean why not if Greece can do it.
On another note.
Petroplus, Europe's largest oil refiner has had its shares suspended, looks like going into meltdown.
Woops.
@kill switch - i beg to differ - greek problems and italian problems and french problems are linked to fundamentals in their economy. If the Euro was Gold backed and Greek govt defaulted on the debt that was assumed by the previous (corrupt) politicians while restauring equilibrium in state's finances, this "international speculative attack" as you call it would be over in a heardbeat. Right now debt to GDP are unsustainable in US/EU/UK etc . The only reason the crisis happened in Greece first is because the lack of mechanisms you discussed (flexible currency etc) - Make no mistake if you devalue a currency by 10pct you tax all the holders of that currency- not even taking into account the fake inflationary gains in nominal prices which are then taxed. I would argue that this crisis a GOOD thing for Europe as if they get their house in order (alas the route they are taking is wrong currently) it will then be CURTAIN for the US led ponzi fraud show.
@kill switch - i beg to differ - greek problems and italian problems and french problems are linked to fundamentals in their economy
Fundamental don't matter in this circus of ......
Did Tyler take down your post ?
A historical visit to earlier, happier times (six months ago):
http://www.reuters.com/article/2011/07/21/us-eurozone-idUSTRE76I5X620110721
Stabilitee is at hand!
Jesus Fucking Christ! Won't these assclowns stop already? FUCGK!!!!!!!!!!
This is not the disorderly default you are looking for... there are no CDS triggers here... move along..
We're going to need a new tag-line rather than, "The Cradle Of Western Civilization."
"Blow thyself"?
"I came, I saw, I defaulted"?
"My name is Nobody" (that one still works!)
quick question what is the "market" debt to gdp of greece (using the bond market prices to evalute the quantity of debt ie including the market haircut expectations ) - if that number is still greater than 40/50 pct on a market debt/ gdp ratio then I would assume the debt stock as a whole is still a short - ie the default will be bigger than priced in. (are the numbers post restructuring of 120 debt to GDP using a market priced debt?)
put some more lipstick on that PIIG
You guys that bought our debt before are getting cheated out of 80% of your returns, but that's OK, we've got a LOT more for sale!
OR... the Eurozone will find a way to inflate the debt out of existence.
Kill Switch - where you at??
Busy, copy/paste, copy/paste, copy/paste.....
Greece needs a sustainable financing option. It's all about creating a sustainable monetary policy, and a sustainable trajectory for way of life where all needs can be provided for by the government, without those pesky hedge funds interfering.
Correction:
Greece needs a sustainable financing option. It's all about creating a sustainable monetary policy, and a sustainable trajectory for way of life where all needs which can be paid for from tax revenue can be provided for by the government, [scratch without] and that way those pesky hedge funds won't be interfering.
Put simply - live within your means and there will be no circling sharks.
Jesus,people actually need some mathematical model to realize that lending more money to Greece at this point is a bad idea? Where the fuck has common sense gone?
It's "funner" to do it with math :)
"Figures don't lie, but liars figure."
How ya gonna know when someone's trying to defraud you, otherwise?
They are smoking bonGs chasing Qpons without feeling the fleece of the price.
I Haiku you.
FYI
Elliott & Associates v the Republic of Peru.... !!!
http://www.scribd.com/doc/79126205/Elliott-Associates-l-p-v-the-Republic...
PP