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On Greek PSI - Headlines And Reality
Submitted by Peter Tchir of TF Market Advisors,
The Greek PSI is once again (still) hitting the headlines.
Here is what I think the most likely scenario is (80% likelihood).
Some form of an agreement will be announced. The IIF will announce that the “creditor committee has agreed in principle to a plan.” That plan will need to be “formalized” and final agreement from the individual institutions on the committee and those that weren’t part of the committee will need to be obtained. The headline will sound good, but will leave a month or so for details to come out. In the meantime every European and EU leader (or employee) with a press contact will say what a great deal it is. That it confirms that Europe is on the path of progress and that they are doing what they committed to at their summits.
That will be the hype that will drive the market higher. They will do it because they have to. They cannot afford an uncontrolled default, so they will have to push forward as though they have fixed something.
The reality of the situation is that the big European banks on the IIF committee will have agreed to the plan. They will confirm it. Other European banks will also agree. They will be told that they will not have such easy access to the ECB or other programs if they don’t agree. In the end, European banks will get fully on board. That is the easy part. What about hedge funds?
I believe hedge funds have 3 trades in Greece right now. The “how much lower can it go”, the “basis package”, and the “let’s play chicken” trades.
How much lower can it go?
These funds bought longer dated bonds, often at a price of 40% of par or lower. If they deal they get is profitable they may agree. Maybe some side deals will be created. Maybe a bank (on behalf of the EU or ECB) will pay 50% or something for these bonds. It won’t be an economic trade for the bank/EU/ECB, but they are all about taking default off the table. Once upon a time “Greenmail” was a strategy, so why not now. How much would it cost to give the funds enough of a profit that they sell or to cut some side deal where they get a bit extra? Remember, these are the same people who are talking about a retroactive Collective Action clause, so don’t put anything past them. That would clear up this source of bonds.
The basis package?
Funds that own bonds and CDS will be the most stubborn, so take them out of the package at 104 or something. That is more than they could hope to make from it, and monetizes it today rather than at some point in the future. A form of “greenmail” but if default scares you so much, do this.
The “Chicken” Trade?
Some funds bought very short dated bonds, March and May of this year, with the hope that the TROIKA would just pay them par whether or not a full PSI had been reached. These are trickier because the amount of potential profit is very high if they are paid at par, but the consequences of “defaulting” might still scare the EU.
Carrot and Stick
So the “greenmail” would be the carrot for funds to participate or sell positions. At same time, during the month while things are “finalized” how many visits would it take from regulatory authorities to scare even an unregulated entity into action. The governments could clearly threaten to scrutinize holdouts and make life harder for them. This is likely more to be a nuisance threat, or threat of some regulations that will never get passed, but at some point accepting the carrot and avoiding the stick might be enough to get the funds on board.
What will we learn?
We will learn that the ECB’s holdings, including Secondary Market Programme purchases are treated senior to other holdings, 50% NPV doesn’t mean 50% haircut, banks will be do what governments want, governments will have crossed a threshold in what they are willing to say and do to hedge funds. None of those are good, and although they are in the back of most people’s minds, confirmation of them will not be good.
The rating agencies will call it a DEFAULT, because it is. ISDA won’t call it a Credit Event because it isn’t. The EU leaders will call it a haircut or PSI, because they have an aversion to saying the word DEFAULT (and to the truth). There will be some concern that calling it a DEFAULT by the rating agencies will trigger some actions. It won’t. The ECB will allow banks to overrule the declaration of the rating agencies. They will say that Greece remains current on some bonds, that Greece will make payments on new bonds, so this DEFAULT situation is temporary and can be ignored for purposes of accounting, mark to market, collateral, etc.. It will avoid the chaos that would ensue, so they will go with the flow.
Then all talk will turn to Portugal. Why should Portugal continue to pay on their existing debt, when Greece just cut a great deal? And Ireland? The reality that Greece will NOT be an isolated case, but will be the norm will hit, and we will see the market give back the gains and sink lower on the realization that the banks recognizing losses is just beginning.
Hard Default
Without the carrot and stick and coercion a hard default would be inevitable. If they cannot bribe and blackmail and threaten their way into something they call PSI, then we will see Greece stop making payments, and then the markets will get very ugly in a hurry. We saw how quickly an entity as small as MF Global impacted markets in unseen ways. This will be much worse. The fear of this happening is so strong that banks and governments will figure out a way to make it seem like they have a deal and then spend the next month ensuring it closes.
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Default has already occurred (where is baltic dry now?), good luck getting any more blood from the few remaining turnups. Aside from the remaining bond scalping that may be done (for the high risk and well-informed bond trader), it is time for the U.N. to "liberate" Greece.
It's 'turnip'
(skin crawls)
sorry, old mafia reference to seeing who "turns up" missing when the bills come due. Now I am dating myself. Remember when Vegas was run by the mafia and actually made money (much of what was skimmed). Same thing happened in Greece, now Greece, like Vegas is nothing but a tourist destination backed by junk bonds and a a whole bunch of "turnups". The puppet masters are quite safe.
EUR short squeeze !!!!! cant wait!!
Good summary !
They will be buying time for themselves to prepare.
Germeny downgraded S&P500 SOARS into 1300! - http://hedge.ly/wxTK6G
@SpellAccorddingly,
it's
GERMONY
damn.
GERMONEY
That's not Germane....
How would the markets respond that 10 trillion LTRO? Total collapse? No. Total madness: banks are saved, buy stocks and bonds! Funding crisis -- don't believe the hype.
And your thoughts on physcal assets for delivery? In particular, where do you see prices going on all the essential commodities. Please enlighten us, I need to know what crops to put in this year.
If you are a hedge fund and you own the bonds and the CDS I would say no. Saying yes to the deal guarantees a loss (assuming bought at a high price). Saying no means you MAY get some money back on your insurance policy.
Even if there is an agreement you know there is a huge gap of where the swap occurs and the values that are still assigned on the books.
Q1 reporting to get pretty interesting for public companies?
Hedge funds to randomly go BOOM shortly?
http://confoundedinterest.wordpress.com/2012/01/18/greek-optimism-turns-...
And that, Ladies and Gentlemen, is 'Capitalism' 21st century style. Or Corporatism as it used to be called. The Government and the big corporations make the rules and then force everyone else into line by the judicious use of threats and 'Offers you can't refuse'.
Been sayin' it here for 2 years. We've already made several irrevocable moves toward state-run capitalism aka fascism light. We're well on the way to state-sponsored private monopolies. Next up price and capital controls. And after that you'll be told what to buy and where to work (if you aren't being told subliminally already)
Baltic Dry Index down more than 50% in 2 months. Close to its alltime low. Now under 1000. This does not mean any good to the world economy. See two different charts of the collapse during last three months.
Graphs here:
http://www.webcompact.net/index.php/news/5962-baltic-dry-index-collapse
The BDI hasn't been a good indicator for over a year now, lots of false signals. The current low may be a decent tell, but I don't trust it yet.
Some volatility in the markets would be welcome. I'm getting bored just watching my long side crawl forward.
Do I have it right that the all time low was triple 6 in late 2008?
correct
Mr. Durden, could you elaborate on what will happen with Portugal, Ireland, Spain and Italy in your opinion after this deal with Greece.
I'll get that, conflagaration, confuscation, jibber, jabber, blah, blah, - lots of talk about nothing with no real action while as much weath is stolen as possible. Same as it ever was. What are the conditions on the ground in Greece now? Remember the U.N. charter? It has VERY specific instructions regarding what happens in certain member countries when conditions deteriorate to a certain point. Aside from a mutual agreement by all the bankers in Euroland that there are no credit events occuring, look to the U.N. charter as to what may actually happen in all these countries eventually.
Laws are like rules, meant to be bent and broken. I believe it is unwise to think that a "Rule Book" is the be all and end all guide in this situation. And besides, I would still like to know what Mr. Durden thinks about this. Will we be looking down from an empty high rise watching tiny figures pounding corn on some abondoned super highway?
Perhaps, but in the real world certain commodities still need to be delivered. When they can't be is when the real shooting starts. The laws of Nature are rarely broken and could give two shits about man-made eCONnomic laws.
And exactly as predicted we're going to get a huge pickup in biflation, thanks to the wise heads at the Fed and the global central banks (along with their politician bitches). They're loading up the bazookas with more trillion dollar jizz for the banks and the crony welfare-state corporations. Countdown to impact has already begun. And we'll see all the negative forces in the global economy intensify. Get ready for another leg down in the buying power of your currency, disintegrating margins and ultimately more job losses and economic decline. If you want a sneak peak look at Greece
and EUR/USD holding above 1.284
Dow rallies 500-700 pts on the news. But then drops 500-700 pts as reality sinks in. But if that is the case, TPTB win...because that will validate the riggged starting point of the Dow at the start of the exercise.
So just like the EU summit, this is a plan to have a plan for the future plan. Today's forecast is 80% chance of can kicking 20% of SHTF.
SHTF will almost never happen now. 99.99% chance of can kicking and celebratory handshakes over a "successful" PSI.
Oh, it will happen.
It will happen when Spanish-style unemployment becomes the norm for Italy, Greece and Portugal.
It will happen because people will finally have no choice.
But yes, it will take longer than anyone believes.
Hocus Pocus bitchez!
Does that mean we're all going to the State Prison created out of a university?
Awesome.
good analysis but im not sure ab out the basis trade. if you bought bonds+CDS and a deal looks likely surely the value of the CDS is going down/bonds going up so if you got the trade levered right you are in potentially serious money.
A default pays out CDS BUT blows up the whole economy so where you gonna invest your wonga after squeezing the troika? hard drugs?
taking it to the wire then cutting a deal at the last minute gives you duble wonga: one on the deal and one on the crashing market that rapidly rebounces off your deal at the last minute.
vs get the cash from greece then watch its value collapse coz you just triggered armageddon
Thats my take, would like to here tylers/peters take on that aspect
Stop making payments that is funny.. Like thew old rules still apply,lol. Ben will row a dinghy across the Atlantic with 2 trillion if necessary to make the payment. The looting will continue until it cannot and we are far from "cannot"..
money never runs out.
Only credibility.
Exactly and the only way the sheep lose confidence, credible confidence in their currency is when it stops providing calories and entertainment, never before and don't talk to me about oil. Those idiots will be reduced to taking bushels of wheat soon or whatever the hell we want to give them. Their our bitchez, they just don't know it yet.
Tchir doesn't understand oil's impact on society, but giving credit where it is due, this is a good analysis in that it doesn't lean too heavily on the numbers everyone already knows.
Rather, it presumes outrageous government interventions in free market operations, and if there's any lesson of the new normal . . . that is it. Governments will do anything to keep the juggled balls in the air.
In the end, the only ball they won't be able to juggle is oil supply, and so far that is dealt with via quiet suppression of consumption per:
http://www.upstreamonline.com/live/article298441.ece
Greece consumes 400K barrels every day. At Brent pricing that is 5% of GDP drained from the country every year (day). There is no monetary fix to this.
So a fella named Terence McKenna came up with a theory (timewave) about how the world would descend in "absolute novelty" (basically everything happening at one time that could possibly happen) around December 20, 2012. Yes he used the Mayan calendar end date and yes it seems to be an arbitrary use of the date upon which to affix his timewave's end.
He created a mathematical formula in a mushroom-induced state of craziness.
Plenty of reasons therefore to doubt him and the math involved.
HOWEVER, interestingly, his timewave (and the recent variant introduced by folks with more mathematical minds) show that world events should appear to actually be stabilizing and improving (relatively) until around April 8th-12th.
Somewhere in that timeframe the timewave begins a parabolic descent into what he refers to as "absolute novelty" in Decmeber of this year.
How interesting that that seems to be as logical a timeframe as any for the Europeans to meet their economic demise, the repurcussions of which will be catastrophic and potentially on a scale unimaginable.
Again lots of reasons to doubt his math AND MIND, but backing the timewave up over the last decade, it does line up pretty eerily with events around the world.
Check it out....if nothing else it is fun reading, the guy was a character.
Do I believe? Not really, but the neat thing is, we get to see very soon....
McKenna was a genius. Here's a link to his "Final Earthbound Interview":
http://www.realitysandwich.com/node/93685
BTW, imo, mushrooms usually induce insight, not craziness. At least from my experience. YMMV.
No doubt they induce insight, it is the useful nature of that insight which I question.
For instance, Timewave/Novelty theory? Very incredible insight.
The fact that the carpet is breathing? Not as useful or incredible an insight.
Either way, I do agree that McKenna was brilliant in many regards, which is why I don't feel terribly put off about mentioning him here.
Yea, default quietly and lie about it afterward ... that's (somewhat) bullish for the euro.
More like, Greece has already defaulted and people are lying about it now. How much more time will the lies buy? A week? Five minutes?
Bottom line is 100% haircuts, not just for Greece. For whom does that fucking bell toll? The entire continent is bankrupt. Europe's remaining assets are useless b/c they cannot be chopped up and burned in a car.
Everything else has 'already been' ...
Meanwhile, the Eurojackasses are still paying $110/barrel for every barrel of crude oil they waste. Every day, deeper in debt, a deeper hole that can never be dug out of ... for the simple reason the waste never did and never does pay for itself.
Let's ss how they finesse this ...
Feeling a EUR squeeze right here big time. Could see 1.35 next week.
Peter may be right that they're desperate enough to avoid default to give selective bigger payouts to everyone who refuses the PSI, but that adds up fast, and turns into a serious shortfall in the debt reduction target. On top of further shortfalls already emerging in Greece's fiscal targets. I think they'll go for some kind of legislated mandatory conversion which will trigger CDS. Triggering CDS is not such a huge trauma. What they are desperate to avoid is the Greek banks having to freeze or devalued deposits.
Are we to believe that if the CDSs are triggered in any sort of substantial way they are able to be paid on? I am assuming the swap holders don't actually have funds to honor a trigger.
before jumping into conclusions, i suggest you all read this paper. it is UNIQUE and referenced by Nomura on its late '11 report..!!!!
http://www.scribd.com/doc/78674006/Withdrawal-and-Expulsion-From-EU-and-...
There is no easy way to exit the EZ, not that we should !! and everybody knows it.
This is the nest paper you can find ! trust me i have almost all of them.
PP
I sit here in awe and shaking my head. I am starting to have doubts if what I read here on ZH is anywhere near reality. Stocks are going up despite the so called problems that ZH keeps writing about. Economic data is not all that bad or it is the biggest lie of the century. Something and someone is wrong. Is it the markets or is it ZH writers? Who the fuck can you believe anymore?
First post - starting to feel like Cole Younger - this whole "mess" could go on forever as long as TPTB are creative enough and remain in control. On certain days I think perhaps we are all looking at this the wrong way - that there will be no Total Collapse in our life time - that it will just continue to morph and churn and consume its way along. Sure there will be blips and quite possibly wars, but I'm starting to think they have got enough game to keep this machine running for quite a long time. Hell its easy to get away with running the biggest ponzi scheme in history when zombies run the show and the sheeples are comfortably numb. Just sayin.
In the meantime I too have fallen into protective mode - little gold, little bit more silver, cash out of banks........
It's all about sharing the pain, within the rulebook (the what?!) or outside it. Acquiesce and get paid 32%. Holdouts? I, Greece, find some cockamamie excuse and pay you nothing. Zilch. Nada.
Illegal? Sue me.
Triggering CDSes? No skin off my back.
It might be a credible enough threat.
Dear Restructuring Committee,
After meeting with the Directors, and the largest investors,
I can provide full assurance to you
That the Eagle's Talon Hedge Fund
Will accept a restructuring of our holdings of the debt of Greece
On the exact terms and conditions as agreed to by the European Central Bank.
Please keep us advised on how the talks with that large debt holder are progressing.
Keep the Faith,
Constantine O'Mally