Greece, Portugal, And LTRO

Via Peter Tchir of TF Market Advisors,

While we wait to see what happens with the Greek debt negotiations, here is a useful update from Bloomberg.

Greek Negotiations Update

There are a couple of things about the article I find most useful.  The first is that they seem less afraid of triggering a Credit Event and some even think it could be a good thing.  We have been arguing that for months and months.

This article estimates that only about €100 billion of Greek bonds are actually in hands that will follow the IIF recommendations.  It is only an estimate, and doesn’t mean that some non IIF members won’t go along, but it also doesn’t ensure that even all the IIF members will.

The negotiations are getting tricky (actually they have always been tricky, it’s just that until recently no one was actually negotiating).  The IMF seems insistent that they won’t provide new money without a high participation rate in an exchange with worse terms than many thought.  There are questions about whether the ECB should participate or not.

I have seen a range of estimates of what price the “new bonds” would trade at.  Even assuming 100% participation for the €206 billion of bonds held by non-priority entities the Greek debt situation will be bad.  The goal of 120% Debt to GDP in 2020 seems a long way off especially as the economy seems to be getting worse rather than better.  Even with the plan, debt to gdp would rise again to well above 120% before it begins the theoretical decline to 120%.  About the highest price estimate I’ve seen for new bonds (with principal protection from the EFSF) is about 75% of par.  The lowest is about 25%.  The more bonds that are exchanged, the higher the value should be, but realistically I think something around 50% to 60% of par is about right.

So, if you own €100 million of Greek bonds, you will exchange them for €50 million of new bonds, that will likely have a value of about €25 million.  Depending on which bonds you own, you could sell those bonds in the market today for about €25 million.  What you are getting if you agree to the deal is becoming clear, so investors need to compare that to what they might get if they don’t agree.

Basis package holders will continue to want to hold out.  This is a small group, I’m guessing only about $2 billion (total Net CDS is down to only $3.2 billion).  The value of the CDS contract (currently 63 points up front) will decrease with a high participation rate.  The basis package holders will want to hold onto their bonds, as deciding to exchange and holding on to the CDS is likely a losing proposition.

Short dated bond holders (next 6 months) will be tempted not to exchange.  If a deal gets announced and the IMF gives the next slug of money, it will be awkward for them to go ahead with “selective default” where they pay the ECB and other “public” holders out at par but not banks, insurance companies, and hedge funds.

The ECB’s Greek bond holdings are very interesting.  They are adamant that they won’t participate.  That has been the line all along, but I’m sure they aren’t happy that the IMF is pushing.  It does raise some questions about the SMP.  Bonds held by the ECB as part of the SMP have no special protections and are not legally nor structurally senior, yet they are being treated that way.  This effective subordination of non ECB holders may weigh on the back of investor minds.  Until now, the ECB’s purchases of bonds have been rewarded by the market with increased risk taking, but if every purchase is subordinating non ECB held debt, the enthusiasm may decrease as you have to balance the benefits of the ECB purchases with the fact that you are being crammed down.  If the ECB takes a loss it could be done in a constructive way (immediate support from Germany, France, and others, to provide fresh injections into the ECB with no complaints), or the losses could be taken in some bizarre fashion with off-market trades to the EFSF or a lot of bickering from politicians about why they shouldn’t provide support for ECB losses.

Portugal and the LTRO

The Portuguese debt problem is much smaller than that of Greece, but it should be attracting more attention.  The entire EU community has stated over and over that Portugal is not Greece, and PSI is going to be unique to Greece.  They can say that, but clearly the market doesn’t believe it.

There are a couple of key points that this graph highlights.  The fact that the 5 year bonds hit a new low is important.  The market is clearly not buying into the rhetoric that only Greece will default (or haircut, or PSI, or restructure, or whatever euphemism they want to use).

Separately, this graph may be the best example of what LTRO has done.  There were 3 earlier summits or announcements or grand plans.  In each case, the 2 year bonds and 5 year bonds moved relatively in line.  They both jumped higher, then leaked lower.  That seems to have changed with LTRO.  The 2 year bonds (covered by the LTRO maturity) performed much better than the 5 year bond.  We didn’t see the 5 year bond participate in the rally to the same extent that the 2 year did.  That would make sense as there was less selling pressure if not outright purchases on the back of LTRO.  But now, the 2 year is starting to follow the 5 year down.  Even LTRO is not enough to keep the 2 year bonds propped up.

The 5 year Portuguese bond shows that the market has no faith that Greece will be a unique situation, and the 2 year bond is showing that LTRO may be useful, but it doesn’t trump actual risk.  Watch both of these closely.

Comments

[Snakeeyes]

LTRO appears to be working for Spain and Italy. Greece is beyond hope unless investors take BIG haircuts.

http://confoundedinterest.wordpress.com/2012/01/27/spanish-unemployment-rises-to-22-9-greece-close-to-deal/

[He_Who Carried ...]

LTRO appears to be working for Spain and Italy. Greece is beyond hope unless investors take BIG haircuts.

That is correct. Next LTRO Feb.3 will set the stage for Greek default, imho ;-)

[Waterfallsparkles]

Now you have to think about who is the counter party to the Credit Default Swaps.

[Non Passaran]

Why? $3bn is pocket change these days.

[Ponzi Unit]

This will drag on as balance sheets expand at the Fed and ECB.

Good for gold, which may finally be entering a new phase to higher ground, however, The Morgue is still lurking, like a pedophile at a playground.

[Squid Vicious]

Spain can't be far behind in the race to the bottom, LTRO or not, with official unemployment now at 22.8%

[_ConanTheLibert...]

and is actually rallying at the moment. This has to end badly.

[disabledvet]

And this is why we really don't care. Sure..."bond holders are being made whole" now, again, as always. Big whup. The banks will just as they have failed here. Move along indeed.

[SDRII]

GDP less inventory 1.94% pts and the deflator  is negative. Thank god for channel stuffing

[LawsofPhysics]

Amazing how this continues.  More stalling, to allow whatever remaining wealth there is to be stolen.  Still seems to me that either Greece leaves the EU or Germany does.  If the latter happens, who will give a shit about the EU.

Write the PIIGS off the books, call it "voluntary" and not a "credit event" and let's move on already.  Good luck to them all after that, especially when it comes to purchasing oil with drachmas.

[RobotTrader]

Meanwhile, the "routine" and Davos remains unchanged.

6:00 am   Shit, shower, shave

7:00 am   4 - course breakfast in the stateroom, served by "Swiss Miss" blonde bombshell waitresses

8:00 am   Attend a few meetings, grant a few interviews with CNBC anchors

9:00 am   Shoot the breeze with Tom Keene

10:00am  Snow skiing

12:00am  Lunch served by exotic Asian escorts

1:00pm    Massage by Ukranian escorts

2:00pm    A few more "meetings"

4:00pm    Cocktails served for happy hour by Egyptian princesses

6:00pm    6-course meal

8:00pm    Play cards

10:00pm  Sex with 3 high-end call girls of your choice

11:30pm  Go to sleep while 17-year old Chinese girls are massaging your feet

[ucsbcanuck]

Wow, Robo - one of your better posts! What happened?

[asteroids]

I miss the pictures Robo.... I miss the pictures.

[youngman]

The stage is set.....I think the Central banks will be buying rather than more haircuts...no one seem sto care anymore...

So that leaves chasing return....the new bubble..I predict new high return inventions to come out of Goldman Sachs...total bullshit items....but they will sell them to Pension funds and investors craving high rates of return.....It might be Mars mining futures...an African Peace inititive..what ever...they will package it and sell it...

[ucsbcanuck]

"It might be Mars mining futures."

Mars bitches! United States of Space!

[smb12321]

You hit it on the head!   "nobody seems to care anymore"   It's a weird fantasy game where trillions (formerly billions) are created to "stimulate the economy" and we carry on as if were not a verifiable disaster. We accept the hogwash that central bank "assets" have valueor that Freddy & Fannie's debts are not real; we nod off while adding trilion+ to the debt annually and ignore the obvious - it can't go on forever.  This sloshing of debt constant headlines has achieved its purpose - the public's eyes has glazed over.

[sudzee]

CB commitment to 20 year zirp will pave the way to a Greek debt deal.

[besnook]

meanwhile iran is set to help things along in greece and italy by shutting off their oil supply

http://www.spiegel.de/international/world/0,1518,811507,00.html

its not nice to fool with mother oil.

[Nachdenken]

The IIF represents only 60% of the total sum being negotiated for a haircut (PSI).  Juncker has this afternoon expressed his impatience with delays and deviations from Greek government reforms.  But you are right here on ZH, the drag is on, to bare bones.  When, well February sounds good to me.

[OldE_Ant]

I think it's interesting that these clowns are only trying to put out financial fires (reactionary policy) vs. looking at the underlying structural problems (i.e. unemployment, lack of competitiveness, solvency, etc. etc.) I always thought that while they are pissing potentially trillions into various financial black holes they might want to take just 10% of that money and put it into things like 'infrastructure upgrades', or new projects that would improve overall productivity or efficiency in various sectors, or better give us access to places to grow.

The US for a long time has needed to improve it's electrical grid.  Similiarly with transport.  Yet we continue to throw good money after bad thinking someday things will improve.   Yep Benny Jerk-my-wankie old boy the joke will soon not just be on you, but everyone on this planet when we find out that the 'real economy' is like 1/2 of the pumped up on debt steriod economy of old.   I see just a paltry .06T to build http://www.startram.com or it's like where we could then could take some significant strides into space so we have some elbow room to grow, and provide earth based robotic operator jobs for all those joystick jockys to play simcity - in real life..

But hey things are going so well.. WHY CHANGE?!

[riskman]

One way to restore the broken market: http://soberlook.com/2012/01/restoring-confidence-in-eurozones.html

[covert]

the messed up market is a natural rezult of a politicial sellout. for example, study to turkish and greek wars.

http://covert.mypressonline.com