Greek Debt Likely Unsustainable Even With Haircuts, Barclays Complete Q&A On PSI
As we discussed earlier, the bigger news of the day (as opposed to the ratings actions which are well-discounted) is the new reality that PSI talks are going nowhere. The lack of incentives for an increasingly 'hedged' community of GGB holders as the banks reduce exposure and shoot themselves in the foot leaves a glaring hole in the dis-union that is the EMU. Barclays Capital is out with a very complete Q&A on 'everything you wanted to know about Greek PSI Talks and implications but were afraid to ask' and while they remain more positive on the probability of a successful outcome than us, one thing we agree on is that even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment in the years ahead.
Greek PSI - Questions And Answers
1) Will the PSI go ahead?
It seems at this stage that policymakers are quite determined to proceed with the PSI and finalise it as soon as possible. If Greece aims to stay in the eurozone without hard default, PSI is crucial as a funding resource (ie, via extension of maturities), as well as to improve debt sustainability. There is still some small probability that the whole PSI negotiations can fall apart and Greece can hard default on its debt. However, in this scenario, the risk of Greece leaving the eurozone would be much higher unless rest of eurozone decided to fund Greece for so many years to come. Given the vulnerable state of the eurozone at this stage, policymakers cannot afford to let such a scenario happen, in our view. Therefore, the most likely baseline scenario, in our opinion, is that PSI will go ahead in some form. [ZH - we are not so sure!!]
2) Can the PSI be delayed?
PSI has already been delayed many times since summer 2011, and there is not another three months to delay it. Greece was able to stretch its finances up until now to avoid a hard default. With the €8bn sixth tranche release from the EU/IMF first programme, Greece has enough funds to continue until the March redemptions (€14.4bn redemption on 20 March 2012). However, without the PSI and further EU resources, there is not any room for the March redemption to be paid. As such, March Greek redemption is implicitly the hard deadline for Greece.
3) What is the likely timeline?
The latest timeline reported by Reuters news reports is as follows. The technical details of the PSI deal are likely to be released over the next week or so. The Troika and Greece would then agree to the second Greek bailout package by the end of January (which is when the next EU summit is held). With all these in place, investors are then invited to the actual PSI process in early February, which is aimed to be finalised by before the end of February.
4) What are the broad targets for the PSI?
The October EU summit set two broad targets for the PSI: 50% notional haircut on €206bn eligible debt targeted for the PSI and 120% debt/GDP by 2020. Alongside these, the PSI was also deemed to be in voluntary in nature.
On the whole, the headlines coming from policymakers still by and large show that they are willing to stick with these broad targets. While the PSI is deemed to be voluntary, the Troika wants €100bn of debt relief from the PSI, which would imply almost 100% participation. This and the voluntary nature of the PSI are in conflict, though, because it is very difficult to get a universal participation in a voluntary PSI (especially recently – some sovereign wealth funds are reported to have said that if the ECB is excluded from the PSI, they will consider themselves “official sector” as well and not participate). However, Greece and the Troika seem much more determined on achieving universal participation and, as a result, are considering retroactive CACs into existing bonds under Greek law.
5) What are the likely technical details for the new bonds from the exchange?
The new bonds are likely to have a maturity of about 30yrs with coupons of about 4-5% and a 50% notional haircut. Investors would receive 35% notional of new bonds and 15% upfront cash (or a similar NPV worth AAA collateral). Depending on the maturity of the old bonds, the exchange bond might have different splits between notional and cash (but still a 50% notional discount) and a different maturity (a bit longer or shorter than 30y).
Let us also clarify the misunderstanding from the media regarding the haircut and NPV losses. The notional haircut is 50% in the PSI if Greece and Troika stick to the October EU summit target. However, the NPV loss will also depend on the final coupon and maturity, as well as the discount rate used to find the present value of the cash flows. For instance, a new 30y bond with 35% of notional, 15% upfront cash payment and a 5% coupon will result in about 65% NPV loss with a 9% discount rate, but a 70% NPV loss with a 12% discount rate. Moreover, while there was a dispute on this about a month ago, it seems most likely now that the new bonds from the PSI will be under English law.
6) Does the PSI in its current form make the Greek debt sustainable?
The October Troika debt sustainability report highlights that the current PSI with nearly universal participation gets debt/GDP close to 120% by 2020. First, this number is still on the high side to conclude that Greek debt is sustainable. Second, the underlying macroeconomic assumptions by the October Troika report in terms of GDP growth and primary balance post-2015 are still optimistic (c.3.8% average nominal growth and average 4% primary balance). If these macroeconomic assumptions are reduced to a more realistic 2.5-3%, then the debt sustainability picture would look much worse.As seen in Figure 1, a 50% national haircut with 50% participation does not get Greece close to 120% debt/GDP by 2020, as envisaged even with the relatively optimistic macro economic assumptions of the Troika. Only if 100% participation is achieved would close to a 120% debt/GDP target be reached. For this reason, the Troika does not want to sacrifice universal participation and is determined to do whatever is necessary to maintain it. When worse macroeconomic assumptions are used, the notional haircut needed for a reasonably sustainable debt path is about 80%.
Therefore, if Greece and the Troika go ahead with October summit broad parameters for the PSI, even with 100% participation Greek debt is not likely to be sustainable in the absence of substantial fiscal and structural adjustment by Greece in the years ahead.
7) How likely is it that CACs will be introduced to the existing Greek government bonds? If they are, will they be used and what do these mean for CDS triggers?
Given the determination of policymakers to achieve universal participation, CACs are very likely to be introduced to the existing bonds, in our opinion. The question remains whether they will be used at the end of the formal PSI process or not. The mere act of introducing CACs does not trigger the CDS, but if the CACs are used subsequently, that action will likely trigger the CDS. While we think that CACs are very likely to be introduced, policymakers would likely prefer not to use them to avoid CDS trigger if they can. In other words, if the mere existence of CACs brings a very high participation such as 95% from the voluntary PSI, then we do not think the holdouts will be forced by CACs. However, if the participation is less, say about 70-80%, policymakers would not hesitate to use the CACs due to the fact that debt sustainability is in even greater jeopardy without 100% participation.
8) Will the ECB participate?
With the probability of CACs being introduced to the existing bonds under Greek law, the expectation that the ECB might participate with its GGB holdings under the SMP has increased as well. However, even if CACs are introduced, it should still be technically possible to exclude the ECB.
During this week’s ECB press conference, President Draghi said the ECB is not in the private sector and therefore is not on table for negotiations with Greece regarding the details of the deal. However, he did not have as hard stance as Mr Trichet, and the press conference was somewhat vague regarding what the ECB might end up doing in the end. Therefore, we do not think some form of ECB participation can be ruled out at this stage.
9) What kind of difference does it make if the ECB did participate?
If the ECB participates in the PSI under the same terms as private investors, it would have certain implications for Greece as well as the markets. First, it would increase the probability of a higher take-up by other investors. Second, the debt sustainability of Greece would improve somewhat more because the PSI eligible paper size would increase from €206bn to about €250bn. The schedule for release of funds from the EU/IMF to Greece under the second programme would not have to be as frontloaded given that the ECB would likely to be holding mostly front-end Greek paper.
In terms of market implications, ECB participation is likely to give the market some important messages. First, it makes the December changes in the ESM draft regarding private sector participation more credible. In other words, Greece is unique and the only PSI for eurozone, but even if there might be more PSI in the future, there is at least some part of official sector that took a loss, which makes the issue of subordination of existing holders less concerning. Second, ECB participation also gives the message to the market that the ECB is determined and willing to be bold to help resolve the eurozone crisis.
10) Does it really matter if the CDS is triggered?
The GGB market is already pricing in pretty much the worst case scenario as bonds post-2014 maturities are trading flat at the 20-25 price level. The contagion effect of the CDS trigger on other asset classes is most likely to be muted as well, or at least not as negative as the market has been expecting. According to DTCC, net protection outstanding is pretty small as well at €3.3bn. More important, a CDS trigger is pretty well publicised now. Indeed, if the ECB decides to participate in the end as well, the market effect, as we discussed above, can be positive even if CDS is triggered. If the PSI negotiations fall apart and a hard default occurs, then the contagion and the implications for the market can be substantial.
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Some EU member countries will be replaced, like Greece perhaps... with other ones to form the top strong guns making up the new Holy Roman Empire... EU is crucial to forming the One World Government.
Things are just cycling around again... a round and a round she goes...
And than UFC will be a figt to the death like in Roman days...
History repeats itself constantly eh?
What do you think is going on here gang? Unions of countries getting together - joining in 'good faith' because they want to help the common people and each other's people out?
REALLY!?!?! Nooo... yea? Come on...seriously?
Im curious to know what it will be for others, not yet unplugged, that will trigger something internal for one to say - 'their really is something else going on and strange'...
I would like to know what that will be. Time will tell.
'The GGB market is already pricing in pretty much the worst case scenario as bonds post-2014 maturities are trading flat at the 20-25 price level. The contagion effect of the CDS trigger on other asset classes is most likely to be muted as well, or at least not as negative as the market has been expecting. According to DTCC, net protection outstanding is pretty small as well at €3.3bn.'
Are these fucking people for real?
Everything is priced in GeneMarch. A US hard default? Yup. Priced in. You name it....priced in. It's fine. Stop questioning things.
in fact it is so priced in that is why the market is flying up now. they realized that they solved all the issued with "priced in".
Say OPA! to gov't default & freedom from debt-slavery...
"priced in" of course best summarized here:
http://www.youtube.com/watch?v=dHKd80asXy4&t=0m48s
US bankrupt and default....yep, priced in, at near all-time record equity highs!
Of course. It's just the rationing, shortages of essential items and social unrest that is not priced in at this point. Can't wait for the neighborhood "have a banker for dinner" parties.
Guess I'm going vegetarian sooner that I thought! :>D
The DTCC does not and never has had comprehensive monitoring of non US swaps.
Period.
Not to mention that you literally cannot quantify the potential damage. They are now just happy to ballpark.
BTW: Austria just got hit.
Please, please, please stop calling it a Greek "haircut." We are grown-ups here, so let's call this what it is. It is a Greek default. I get so sick of that Orwellian terminology.
Ssssst! The CDS are listening...
READY ALL QUARTERS!!!
LOAD ALL CANONS!!!
AND HOLD YOUR GROUND MAN!!!
and let's hope the Butchers bill won't be to high....
I think the markets are still stoned on hopium. Hardly a dent today. This activity looks more like a normal profit taking day rather than a bad news day. I guess until things are actually falling off the cliff about half way down they might realize things are actually really bad. On another note. JP Morgan's CEO doesn't think it's that bad.
Dimon: ECB Has Removed Bank Failure RiskThe European Central Bank’s move to provide three-year loans to the region’s banks and accept a wider variety of collateral has eliminated the risk a bank runs short of funds for at least the next year, JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon said.
This market will finish in the green today. The shorts better throw in the towel. Marc Faber said a basket of real estate, stocks, commodities and treasuries are where it's at. Marc Faber.
Once they condition enough people like you to believe this line of thinking, they will take it down so you sell in a panic. See: April 2011.
There is the lowest short interest in however long in the market right now. What are they waiting for?
He also added Precious Metal's in there as well fyi.
If everything bad and downgrade is on its way ..why mkt going up ?
Seasonal rotation and the pe crowd sees a screamingly cheap market
@ np1262873,
Why you ask? It's a huge Global Ponzi Scheme of magmic proportions and a system of Debt Slavery built by the Elite for thousands of years. It's all an Illusion. And many in the Matrix haven't realized that yet.
Just default already.
greek citizens heading away from athens to live off the land.............how many u.s. citizens could do that????
http://www.nytimes.com/2012/01/09/world/europe/amid-economic-strife-greeks-look-to-farming-past.html?pagewanted=2&_r=1
I think you'd be surprised how many US citizens could and would do that, given the proper motivation.
All the smart money left the country (like France) a long time ago.
Nothing new! Kik that cheat country out of EU and at least we all are better off by saving money on tree's and nature instead of wasting paper every day.
So fucking what!!
Market is ramping into the close again. Fucking Bullshit is Fucked the Fuck Up!
To sum up. Even with a 100% haircut to the Greek debt, the current government spending and structure is unsustainable.
yup.. the end of the day ramp fest begins.. fucking sickening.
Damn I read the first comment on Krugman's NYT post and started laughing out loud.
"Bravo to the Greeks returning to the land and empowering themselves...a rude awakening that everyone must endure because of the money for doing nothing trickle down effect we have had for too many years. The world was excessively exuberant.... then the bubble burst they were left with debt, home and job loss....
The beauty of the Greek condition is they have a piece of land to go back to..which others will return to to revitalize the villages and create new products and jobs...It has to begin somewhere. I predict within 5 years we will see new exciting products coming from Greece, Spain, and the Euro Zone..."
People are fuckin idiots.
Sounds like "Grapes of Wrath".
http://en.wikipedia.org/wiki/File:Lange-MigrantMother02.jpg
Reason to celebrate???
Krugman should go join those that have to go back home and work the land. Get that m-fer a pick, shovel, rake and let's just see how long that wind bag m-fer can hold his own?
Fnk keynesians make me puke.
Sound Money Ron Paul 2012
Greek 10 year at 35%: http://www.tradingeconomics.com/greece/government-bond-yield
Greek 2 year 175%: http://www.bloomberg.com/apps/quote?ticker=GGGB2YR:IND
Greek 1 year at 400%: http://johngaltfla.com/wordpress/2012/01/13/greek-1-year-bond-yields-top...
The only reason the Italian 10 year is down below 7% is the ECB has given up on Greece and is buying the much bigger problem country bonds to try and plug the dike.
Good luck with that.
Greece default on or before March 20th, disorderly.
Good point. There's only so much gum they can chew before they can't keep up plugging the cracks and the damn ends up bursting.
Wha,wha,wha,wha, whatt????
You folks seem to indicate I WON'T collect my 400% yield next year.....sheesh. Next thing you know you'll tell me Ireland is insolvent. (oops)
Get these truths through your heads:
1) There Is No Default. There is no international bankruptcy court for expungement. Banks don't have to listen to a Greek declaration of default and that they won't repay the debt. The banks can just ignore the declaration, continue to compound the interest owed and send them requests for payment. If Greece ever holds assets outside Greece or outside the EU, the banks can get a local court order to confiscate. In other words, the debt is forever.
2) The debt ceases to be forever ONLY if governments expunge it by decree, or threaten bank officials with incarceration. This would have to be internationally coordinated. Not likely.
3) Greece cannot repay this debt. Oil is everything. Greece needs 400,000 barrels per day, all of it imported, to fuel their existence. Computed annually at Brent pricing this is about 5% of the (sinking) GDP drained out each year, and that % will go higher. No country can survive this.
3) Greece cannot repay this debt.
In the old system the feudal lords would give out loans to people knowing full well they will not be able to pay it back. The repayment in cash was never expected or sought, but servitude and slavery from then on. Its quite an old tactic in the book.
we are all vassal's today in 'fief`dom'
No one gives out loans to anyone. One offers loans and people choose to borrow. They can walk away and live within their means instead. They choose not to.
People will always manufacture some compelling reason why they can't live within their means. The kids need new shoes. The kids need college. The wife needs a car to cart the kids around.
At the government level it is . . . the old folks need pensions. The poor need health care. The employees need pay raises.
There are only food and air and water for **needs**. Everything else is a want. EVERYTHING else is a want.
Greece has wanted a lot for years. No one made them borrow. They chose to. Now they are trying to steal money from the lenders.
...There Is No Default. There is no international bankruptcy court for expungement....
You must apply your criteria accross the board. Let me ask you a question?
WILL THE USA PAY BACK ITS DEBT, PROJECTED TO RISE TO 150-180% OF GDP BY 2017??? As there is NO let up on deficit build up in its five year budgets. Congress will make sure of that even if Obammy gets second term.
IF YOU CAN SINCERELY ANSWER THAT AND THE ANSWER YOU GIVE IS THE SAME AS THAT IMPOSED ON GREECE, YOUR THEORY WILL MEET "MANIFEST DESTINY" CLAUSE OF US OF A : "WE NEVER PAY".
Remember what the Romans said : Quod Licet Jovi, non licet bovi. What was allowed to Jupiter was not allowed to oxen.
Now tell me who is bon jovi and who is bon bovi...
I can not believe that European Union still has something named "Maastricht Criteria".
I can not believe that European Union still has something named "Maastricht Criteria".
You cant have a religion and fellowship without a bible.
First Greece, than Spain than Italy then Ireland (maybe not in that order), one by one squeezed real good like oranges. All juiced out and then trashed in the default bin by the EU Exit .....
"In the end there can oly be one"
NEXT !
2 of 4 on your 'then[s]'
My bad!
if i were a ponzi master, i too would get the shorts to give up all hope, have everyone go long. and then, in the wee, wee hours of the morning, one winters' night, BANG!!!! bank holiday, markets closed for days, internet down!
when markets re-open, the monies you all thought you had, well, you had. there is always a motive. remember too, they play by rules, where the house always win!
It's hilarious, is it not, that we suddenly need the banks to tell us what we've literally known for 2 years.
The pressure today with ratings downgrades is simply S&Ps attempt to put more pressure on those that are dawdling on Greece...deal will be miraculously agreed to over the weekend ...Euro will go up 200bps and all will be well
"Net protection outstanding is pretty small as well at E3.3bn" ... Yeah ... right ... JUST 3.3bn .............................
We should be on the side of the Greeks in this. Tell the banksters to pack sand.
http://strikelawyer.wordpress.com/2012/01/13/reality-in-greece/
Just default already and join the axis: http://en.trend.az/regions/world/usa/1979834.html
Assuming that Greece stays in the EU, Greece’s level of unsustainable debt means that structural reforms, coming via a ceding of sovereignty, such as an over-ride of the Greek constitution restriction of termination of employment, that has provided lifetime employment, is coming, as EU leaders meet in summits and waive national sovereignty. Substantial fiscal changes are coming. European Socialism, particularly Greek Socialism, grew via the Euro, as the global government finance bubble expanded. Substantial numbers of people were placed onto the public employment rolls as the Euro came on line in 1998, and as Greece’s sovereign interest rate fell lower. Now severe fiscal adjustments will be coming, that greatly reduce state worker employment levels.