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Goldman Unveils The Script In The Greek Haircut Kabuki
It will come as no surprise to anyone (other than Dallara and Venizelos perhaps) that all is not rosy in the Greek Public Sector Involvement (PSI) discussions. Whether it is the Kyle-Bass-Based discussions of the need for non-Troika haircuts to be 100% for any meaningful debt reduction, or the CDS-market-based precedent that is set from chasing after a purely voluntary, non-triggering, agreement, the entire process remains mired in a reality that Greece needs much broader acceptance of this haircut (or debt reduction) than is possible given the diverse audience of bondholders (especially given the sub-25 price on most GGBs now). As Goldman points out in a note today, the current PSI structure does not encourage high participation (due to the considerable 'voluntary' NPV losses), leaves effective debt-relief at a measly EUR30-35bln after bank recaps etc., and as we have pointed out in the past leaves the door open for a meaningful overall reduction in risk exposure to European sovereigns should the CDS market be bypassed entirely (as the second-best protection for risk-averse investors would be an outright reduction in holdings). The GGB Basis (the package of Greek bond plus CDS protection) has been bid up notably in the last month or two suggesting that the banks (who are stuck with this GGB waste on their books) are still willing to sell them as 'cheap' basis packages to hedge funds. This risk transfer only exacerbates the unlikely PSI agreement completion since hedgies who are holding the basis package have no incentive to participate at all.
The Greek bond - CDS basis package price has risen notably in the last month or two as banks offload GGBs to hedge fund basis packagers. While this may help reduce risk exposure on the bank's balance sheets, it further diversifies the ownership of Greek bonds and dilutes the likelihood of any broad agreement to a PSI at all (given basis package holders have zero incentive).
Goldman Sachs: Greek PSI: What To Watch
- Large PSI participation is necessary in order for economic benefits to be meaningful.
- However, the current PSI structure does not encourage high participation.
- Downside risks could persuade investors to participate.
- But in the event that an involuntary solution is chosen, the way that the restructuring deal is imposed will set a number of important precedents for Euro area bonds.
- We discuss a non-exhaustive list of the relevant dilemmas.
Recent press reports suggest that Greek and Euro area officials may be close to an agreement with the IIF on the structure of the Private Sector Involvement (PSI) plan, which is meant to reduce the debt burden for Greece on a voluntary participation basis. The reports suggest that an agreement may be reached by next week. After the agreement is reached, the application of the PSI will commence. In today’s Daily, we discuss the risks involved in the PSI application and the key issues to watch.
Why Large-Scale PSI Participation is Necessary
The key issue in the Greek PSI is the large dispersion of bondholders and the need for a high participation rate in order for the whole operation to be meaningful economically. As we published in a recent note, using Bank of Greece, EBA, and ECB data, we estimate that out of the nearly EUR360bn of Greek debt at the end of 2011, about EUR210bn are held by markets. The rest of the debt represents official loans and bonds held by the Bank of Greece or the ECB.
Out of the EUR210bn of marketable debt, a bit more than EUR85bn is held by Greek banks, mutual funds, and pension funds, about EUR55bn lie with Euro area banks, and the rest with other foreign entities. Of the officially held debt, EUR50bn of bonds have been bought by the ECB as part of the SMP programme.
Assuming that only Greek entities and Euro area banks participate (a large portion of which are represented by the IIF), then a total of about EUR140bn gets restructured. However, for some of the debt that is written off within Greece, the government will need to borrow anew in order to recapitalize local credit institutions. Therefore, from a 50% debt stock reduction in EUR140bn of bonds, the effective debt relief could potentially be as low as EUR30-35bn (there is a significant margin of error in these calculations depending on the way in which that part of the domestic losses will be replenished/distributed).
The true economic gain for Greek debt sustainability stems from external debt reduction. If for example the ECB and the rest of the private sector (ex Greece and ex Euro area banks) were to participate in full, then the effective debt relief could be as high as EUR100bn (about 50% of GDP, or 28% of debt stock reduction).
While in terms of funding needs for the next aid package a more limited participation could work (the assumptions of participation in the 2012 Greek budget are not extreme), in terms of actual sustainability, even a EUR100bn reduction in marketable debt may not suffice to stabilize debt dynamics; an additional reduction in interest payments for official loans may be required. Of course, smaller reductions in marketable debt would further reduce the effectiveness of the restructuring operation.
Structure of PSI Does Not Encourage High Participation
Again as we have discussed in past research, the starting point of 50% face value reduction makes it quite hard for private investors to opt in enthusiastically. This is because with a slightly lower coupon and a maturity extension, NPV losses could be about 70-75% depending on the discount factor, the collateral for the new bond, and the maturity of the original bond.
Such losses touch historical recovery rates in past restructuring episodes in other countries and are close to or even below market pricing in certain circumstances. Furthermore, the hit to front-end bonds could be larger.
As we have suggested in the past, the structure of the PSI could be altered and geared more towards coupon cuts than face value reduction in order to offer more upside for investors to opt in. But that does not seem to be the structure of choice for policy makers at the moment. Thus, without much upside offered to them, investors would participate either if they assessed that there is meaningful downside to opting out or if the restructuring were to occur in a forced manner.
Precedents that PSI Implementation May Set
The threat of a disorderly default, involving minimal recovery rates for near-term bonds and intense pressures on the Greek banking system, could be enough to encourage investors to opt in. However, in the event that participation is poor regardless of the disorderly default threat, and the restructuring becomes involuntary, then the way that investors are treated will set a precedent that will affect the premia and the micro-structure of several Euro area bond markets. To name a few of the key issues to watch:
- How will ECB held bonds be treated? In the event of an involuntary restructuring episode, exclusion of ECB bonds or a separate more favorable treatment could create significant disputes with private investors holding bonds of the same legal statute. More importantly, it could create the impression that under extreme and arguably low-probability circumstances, private sector investors would become de facto subordinated to ECB holdings. The larger the ECB holdings, the larger the losses to the private sector under the same line of reasoning. That could create an adverse connotation to the SMP purchases.
- How extreme will local law be employed in order to enforce certain outcomes? News reports have highlighted the possibility of retroactive imposition of collective action clauses (CACs) on Greek bonds allowing a large majority of bondholders to opt into an exchange that is binding for the rest of the debt owners. This would require a change in Greek legislation. Tweaks of local law to accommodate debt restructuring outcomes could create a broader market segmentation between bonds issued under local law and those issued under UK and law issued bonds in other markets’ law, with investors opting for the safety of bonds issued under foreign law.
- Will CDS be triggered? A CDS triggering event is by no means a desired outcome. However, trying to completely bypass CDS in the event of less than voluntary restructuring would cancel out the validity of the insurance market for sovereign risk. Without credible insurance for sovereign bond holdings, the second-best protection for risk-averse investors would be an outright reduction of these holdings.
Euro area policy makers have been very outspoken in making the point that Greece is a completely different case from other Euro area countries. However, in the absence of a credible commitment to no restructuring in the Euro area outside Greece, markets will continue to price spreads in Euro area bonds in a risk-averse way, factoring in the remote possibility of extreme outcomes occurring elsewhere too.
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Roll credits bitchez!
In other news, looks like our free markets are back to BTFD mode.
I don't expect it to last. I think reality (and gravity) is going to hit the markets very soon.
So does the Fed. They are saying the economy needs help.
One week later ... "market can stay irrational longer than you can stay solvent"
Yep, equities to the moon, with some occasional "unforeseen" dips.
The Fed is starting to talk about how the economy needs help again. Bernanke to frontrun WWIII in 3...2...1...
Greece seems to have reported a higher budget deficit for 2011 than forecast but that might simply be the new regime shuffling 2012 problems back into 2011. It also draws heavily upon EU Structural Funds. What does the Greek Budget actually look like without Subsidies from the EU in all the various forms ? Is it really a viable country at all ?
OK So I found this:
EU transfers to Greece continue, with approximately $24 billion in structural funds for the period 2000-2006. The same level of EU funding, $24 billion, has been allocated for Greece for 2007-2013. These funds contribute significantly to Greece's current accounts balance and further reduce the state budget deficit. EU funds will continue to finance major public works and economic development projects, upgrade competitiveness and human resources, improve living conditions, and address disparities between poorer and more developed regions of the country. The EU plans to phase them out in 2013.
Just wonder how much extra flows from various pork barrel funds to mask Greek inability to tax and spend as oppose to spend and borrow. The Greks have a lovely lobbying machine throughout Euro institutions making the Irish look positively upright
'Will CDS be triggered? A CDS triggering event is by no means a desired outcome. However, trying to completely bypass CDS in the event of less than voluntary restructuring would cancel out the validity of the insurance market for sovereign risk.'
LOL. Of course...
Hank Greenberg (on Bloomberg now) is a pussy!
Now did he really hire all those Drexel guys like Joe Cassano to use AIG credit rating to produce CDS for high risk products ?
We're central banksters, we dont TAKE haircuts! We plan WAR!
CDS or No CDS....that is THE question.....haircuts don´t matter at this point...that is pennies on the dollar....I bet there are trillions more in the CDS markets to be played with.....and people want to know if the Casino is working...ESPECIALLY GOLDMAN SACHS
does GS now just wait for stuff to be posted on ZH, clean it up, and send it out as their own research?
"Euro area policy makers have been very outspoken in making the point that Greece is a completely different case from other Euro area countries."
And, of course, we all know that whenever these "leaders" speak in declarative statements on anything during a crisis, it's a lie.
And there is no housing bubble, subprime is contained, etc.
Been there, done that.
Bagdad Bob lives on...and on..and on...
http://www.welovetheiraqiinformationminister.com/
Yes. After Greece wipes out a billion of debt they expect Portugal and Ireland to remain shackled to their commitments?
I honestly think Portugal and Ireland are just keeping their heads down an praying nobody kicks them out of the union. Portugal is trying hard to tow the line. Without the EU they are well and truly eff'd.
Italy is guaranteed to restructure its debt in some way, shape of form.
it is most likely to - unsustainable debt/gdp ratio. Step 1: bring primary budget into surplus.step 2. Use LTRO funds to extend average maturity of all italian debt held by italian banks.
"like printing money but not printing money"
It's just an attempt to get used to the cold water slowly. But ultimately, the outcome is certain. There will come defaults one way or the other (inflation). We're just in the phase of bargaining
Yeah....
Pretty soon Greeks will be dancing for Feta Cheese.
http://www.guardian.co.uk/world/video/2012/jan/07/andaman-islanders-huma...
"Cow pies for sale! Cow Pies for sale! Wow, I'm not selling many of these, any ideas?"
"Maple Syrup?"
"Pancakes! Get your hot fluffy pancakes!"
MsCreanta, The Greek: "I got some spiffy new jets for ya' on the cheap. 60 of them we were just forced to buy to get bailout funding."
"Bomber jets, get your hot bomber jets, fresh off you're-o-peein' production lines."
It's nothing if not telling. Something wicked this way comes, and the Greeks are preparing themselves not for just an economic crisis, but for a war.
Not even close. I can't force you to commit suicide. However, I can lend you the money to buy a gun and then day after day suggest that you put an end to yourself. Now if need be, I'll point you to some literature.
I could just shoot you with the gun you loaned me money to buy. That would shut you up. There was more leverage in play here than that. Greece is looking like a zombie animated puppet, for sure. What drives me nuts is the fucking ongoing Kabuki theater show where we pretend that they are trying to help them solve their debt problem when it is clear the fascist elite ARE the debt problem. We play their game debating CDS triggers and stuff. We get suckered in because we have chips in the game ourselves. We are permitted these chips so that we will support the story line.
There is no debt. There is no spoon.
natural gas goes down 3% every fucking day...but energy stocks never move....ha ha shit if my assets went down 40% I would be fucked....ha ha oh I am fucked...
Stop buying fucking jets and military boats you ass wipes.
How can you post this article, how can you discuss haircuts, or not, seriously?
I'm going nuts, perhaps that is it. I would be so relieved to know I am crazy, that way we wouldn't need to fix what is insane, we could just commit me.
FUUUUUUUCK!
I hate this, hate it, hate it, hate it.
I felt the same way yesterday. I don't know why I woke up felling different this morning. Maybe it is because I have been here long enough to know it doesn't change in a day.
So don't worry, we have set ourselves up for what may come, when it comes. It's coming, but the can kicking professionals are dong what they do.
The plan is long in the tooth, and we are watching the walls close in from everyside. Luckily for us, we are on the outside looking in; not that it makes it much easier when we are watching the hopes of the many get crushed. Yet we know that there will be a better day. Keep doing what you do, my lady, but try not to worry too much.
I'm shocked I get angry any more. I'm shocked I can still be surprised at the open, in your face, blatant dishonesty. But I am. I keep thinking when I tell myself "anything goes" that I've finally "got this." I don't.
As you know my friend, if you and I were unable to pay our bills, and everyone knew it, we would not be buying Hummers, boats, and planes because no one would extend us the credit. That is as it should be. How can everyone keep a straight face and talk about what to do about Greek debt when they are buying jets? That is where I see the normalcy bias or cognitive dissonance, if you like. The only answer is that everyone is lying, lying, lying. There is a reason for a war all right, and it ain't US vs. Iran, Iraq, Afaghanistan, or any other Icountry-o-stan.
You think they buy out of free will?
In my post to Ebworthen, I indicated that in fact, I did not.
They really need to stop these games and do it the right way. Restructure the debt in a manner which makes it sustainable over the long-term. Forget about anything "voluntary" and the irrational fear of CDS triggering.
People are acting as if this is the first sovereign default in history. The world will survive a “hard” Greek default. It’s really not such a big deal.
Behind the scenes Greece has a gun pointed to her head with an ultimatum....suicide or we will pull the trigger.
The people are subjected to sackings, wage decreases and pension cuts, as well as tax increases, lower tax thresholds and price spikes for electricity, yet the ignorant mongrel politicians who raped her and sold themselves for commissions to foreign arms manufacturers, are barely touched. And all this in a tiny country which somehow needs 300 politicins in its national parliament.
It is a fact that Greece cannot run a primary surplus even if it had NO DEBT, so where do the Einsteins get there info from saying that 50 per cent is adequate?
Mind you the bulk of the bailout funds to date have gone to bailing out foreign institutions.
It is a sick game that is being played at the expense of all taxpayers everywhere in the name of keeping banks alive, people enslaved and governments free to overspend at the expense of the fuure.
They will never reform until they are cut loose. Stop the bailouts and let the Greeks solve their own problems. These bailouts are creating a huge moral hazard and simply compounding the problems.
Greece is not too big to fail and should have been allowed to fail long ago. In 2010, the losses would have been 150B Euros. Now, we’re looking at 300B of losses. In 3 years, we’ll be looking at 500B Euros of losses.
I wonder how many more times I'm going read this kind of pseudo-intellectual platitudes about "moral hazard", regarding the Greek bailouts.
Do you still believe that anyone gives a flying fuck about morality at this point?
Do you think that all these bailouts given to Greece over that past years was to solve Greek's problems?
Do you understand that almost 80 cents of every Euro given to Greece goes to the Banks, while the compounding expense of this process is subtracted by the Greek people's quality of life?
"Moral hazard" is that Greek society is being eviscerated so that banks can cover their losses of their imprudent betting.
Didn't Goldman get them into this mess in the first place? This reads like a veiled threat that if Greece doesn't play ball, all their friends will suffer. Maybe not so veiled...
Yes in return for the revenues from the new Athens Airport paid for by EU taxpayers
What about the $39 trillion pension problem in Europe? Greece can handle this? LOL!
Eurozone Has $39 Trillion In Pension Liabilities - Almost 10x The ECB's Balance Sheet!
http://confoundedinterest.wordpress.com/2012/01/11/eurozone-has-39-trill...
This whole situation with the PIIGS seems centered around buying more time. The endless summits, meetings, plans and announcements seem to be desperate attempts to buy time for something. The time is getting increasingly expensive.
I think part of it is to get some TBTFs time to reduce their exposure to this impending implosion, to get them backstopped by the taxpayers (ie BofA moving their trillions of toxic exposure over to their FDIC covered banking arm.)
Perhaps some well heeled individuals or idiot sons playing banker need time and an outlet to dump some of their "sure thing" investments? I see the retail and banking sectors leading recent upswings on the Dow and like many other posters find it maddening. All the effort to fluff these banks, print money, lower rates, push propaganda through the ministry of truth (CNBC) has to be one big play for time so the elite can get out and leave everyone else holding the bag.