D-Day For Greece And Another Eurocalypse Report From Goldman Sends Europe Tumbling Once Again
And so once again Greece, and Europe in general, reminds the markets it exists, and in doing so sends risk lower across the board. The most specific reason cited why the Euro is in multi-month freefall, and French and Italian banks are tumbling is that today is D-Day for the Greek bondholder debt swap, which expires later in the day. As a reminder, as part of the Greek Bailout #2, about 90% of holders of Greek bonds are expected to tender their bonds in order for the "bailout" to be successful. There is one problem: this is not happening, and now the backtracking begins. Adding fuel to the fire is another wolf in sheep's clothing report from Goldman which while saying the same banks will be ok at the end of the day, implies that many others will be locked out from capital markets, and will force many of the smaller banks to liquidate: to wit - "If the governments choose to impose haircuts on banks’ sovereign debt holdings, capital will need to be raised. We see banks that trade at reasonable valuations being able to do so in the market. However, those most likely to be effected (GIIPS domiciled) would need to source capital in the public sector; their low valuations would likely make this prohibitively expensive for existing shareholders." Read - bankruptcy... Not the word Europe needs to hear today.
Per Reuters, "investors in Greek government debt worldwide will tell regulators on Friday whether and how they will participate in a bond swap aimed at giving Athens more time to emerge from a debt crisis, with officials expecting a take-up of about 70 percent. Greece had threatened to cancel the deal unless it got 90 percent participation, which would see 135 billion euros ($189 billion) of its outstanding bonds maturing by 2020 swapped or rolled over in a global transaction it wants to conclude next month. Even with a participation rate of 70 percent or better, which is my current view, the PSI will proceed," said an Athens-based banker close to the procedures. German investors share that view, a big German bondholder told Reuters. A 75 percent takeup rate would be a success and enough to convince the political side of the deal , 90 percent was unrealistic from the beginning, he said. The threat to walk away may merely be a tactic by Athens to get most of bondholders on board, bankers said." In other words, a bond exchange that leaves about 30% of the Greek debt at untouched notionals is somehow supposed to indicate that Greece is serious about cutting its debt load? At this point the farce is so ridiculous that even the market says enough: Greek CDS, as utterly irrelevant as it now is with bonds trading on liquidity recovery values, rose to 53.5% mid points upfront, a level which implies a 100% chance of default, which in turn means the end of the Euro, and hence the Eurozone.
More from Reuters:
Greece is not planning any announcement on Friday as bondholders' non-binding responses must be aggregated by their respective regulators which will then send data to Athens, a process that may take time, the debt agency chief has said.
A high participation rate would give Athens cash-flow relief and more time to get its fiscal house in order amid rising worries that its commitment and ability to implement economic reforms prescribed by its international lenders is wavering.
If it goes through, the deal may offer some short-term relief to riskier assets and may push Bunds lower, but the move is likely to be short-lived given that Greece is missing its fiscal targets and EU/IMF aid is at risk.
"In a way we are more concerned about Greece getting their money than about this debt swap. There is a risk that Greece will soon run out of money," one trader said.
"The Greek situation is not getting any better and the Italian situation is monitored very closely so I don't see why we shouldn't see any (Bund) buyers on any pullback," the trader said.
A low participation rate in Greece's debt swap may mean reluctant euro zone partners will have to cough up more cash for the overall package to work.
But a take-up rate close to target will not require major plumbing to adjust the rescue package, bankers said, adding that the shortfall could be covered by reallocating funds.
A source close to the procedure expected strong take-up in Europe, where the majority of Greek debt was sold for years.
"There is more support in Europe, where they will likely go for the full amount," the source told Reuters.
It is once again Asia's duty to bail out the world (remember the joke that is the IMF? Neither do we).
On Wednesday, another source close to the PSI talks said roadshows were taking place in Asia and America and that it would take more time to conclude the deal.
In the meantime those who listened to our advice from early 2011 and bought Dexia CDS, can prepare to retire:
Greek and European lenders such as National Bank of Greece , France's BNP Paribas , Belgian group Dexia and Germany's Commerzbank are among the biggest holders of Greek bonds.
That's right: Dexia senior CDS is 655/705 while subs are trading point up 27%/32%, a far cry from when we suggested to double then and then margin up on the default risk of the recently CEO-less Belgian bank.
And the last hit on this Euro-implosion morning comes from the Telegraph which cites a new Goldman report that should governments impose a haircut on sovereign debt hldings, the bank stocks will "struggle to raise further cash" - arguably not the thing Europe wants to hear:
Banks in Greece, Italy, Ireland, Portugal, and Spain will struggle to raise capital if governments impose "haircuts" on banks' sovereign debt holdings, Goldman Sachs analysts said in a note.
The investment bank's analysts said banks that trade at reasonable valuations will not have a problem raising cash in the market.
"National champions, from the ‘core’, are likely to experience losses ... of 0pc-30pc of their market capitalization.
For these banks, access to equity markets has not closed," the analysts said.
Golman's analysis is based on including the effect of a "sovereign shock" to the recent European banking stress tests, reconfiguring them to simulate a theoretical haircut across the sovereign bond holdings of individual banks.
In their view, banks domiciled in the so-called GIIPS nations are likely to face difficulties raising capital in the market.
"Here, capital would need to be provided by the sovereign (leading to partial or full nationalizations) or by multinational institutions (for example the European Financial Stability Fund)."
The analysts lowered their price targets on several European banks, including Italy's UniCredit, Spain's Banco Santander and Greece's Agricultural Bank of Greece.
And so on. Full report below: