Guest Post: Greece - Two Bail-outs and a Funeral

Tyler Durden's picture

Submitted by Alex Gloy of Lighthouse Investment Management

Greece: Two Bail-outs and a Funeral

Here we go again. Another bail-out. [Sigh.]

I’ll try to make this as entertaining and easily readable as possible – but first the details of the bail-out agreed on July 21st:

  • Fresh EUR 109bn EFSF/IMF loans until mid-2014
  • Private sector (read: banks) participation of EUR 37bn
  • EUR 12.6bn from bond repurchases at below par (100%)
  • All EFSF loans extended to 15-30 years with interest rate cut to 3.5% (same relief granted for Portugal and Ireland)
  • EFSF re-tooled: flexible credit lines, purchase of bonds in secondary market, recapitalizing banks
  • “Marshall Plan” for Greece (increased investments by EU)


  • First and foremost, let’s call it what it is: a default. Fitch (ratings agency) now rates Greece “restricted default”. This is because some lenders will lose, according to plan, 21% of their “net present value” by exchanging existing debt into new debt (I will not go into detail, since boring and irrelevant).
  • The debt exchange is “voluntary”. The plan expects 90% participation. What if a bank decides not to participate?

(The Greek Finance Minister is being told the EU inspectors have arrived. He starts to whip himself to the liking of the German-speaking inspectors)

  • The IMF, in its latest study[1], now sees Greek debt-to-GDP rising to 172% in 2012 (and the IMF is not known to be on the cautious side). Let’s say all the banks participate. The FT estimates the bail-out could reduce Greece’s debt of EUR 350bn by EUR 26.5bn – less than 8%. That would leave debt-to-GDP still north of 150%. Are you kidding me? Not even a year ago the IMF predicted Greece would never exceed 144%. What a joke. While Greece does not benefit materially, banks can exchange their bad holdings for new bonds guaranteed by the European tax payer.
  • CDS (credit default swaps): ISDA (International Swaps and Derivatives Association) ruled that the Greek debt restructuring is not a “credit event”. Hence, no pay-out on default-insurance. Going forward, this might make it even more difficult to get financing for troubled countries (or companies located in them) if CDS are found not to be an effective insurance.
  • ECB lost its credibility (if there was any left). Remember when President Trichet (“tricher” in French means “to cheat”) claimed that buying government bonds of troubled countries “was not discussed” only to launch massive purchases the following Monday (May 2010)? After amassing EUR 79bn of Greek, Irish and Portuguese bonds (now all “junk”-rated) and substantial losses Trichet warned the ECB would not accept “defaulted” bonds as collateral for loans (which would bankrupt the Greek banking system within minutes). (This was after earlier promises not to accept “junk” rated bonds). Broken promises over and over again.

(Greek folks are, rightly, incensed at the idea that EUR 50bn of Greek assets will be sold to reduce the debt burden. Asset sales are ok, but the prices achievable under current conditions will be very low.)

  • Credibility is the utmost important feature of a central banker. Why? Things only are of value when they are rare. Same with money. Central banks have the monopoly to print money. People trust them to keep its value stable. How can you know? You can’t. You have to trust them. They could change their mind overnight and switch on the printing presses, leaving you holding a lot of worthless paper. Trust comes from credibility. Trichet has destroyed both. The decision to purchase doubtful government bonds in the secondary market was utterly stupid. 1 – it did not benefit the issuer (government) as proceeds went to seller. 2 – ECB ended up with losses on its balance sheet. Participating in a debt-restructuring would realize these losses, making the ECB an opponent of debt restructuring (conflict of interest). 3 – only motivation for intervening in secondary market was to manipulate prices. The ECB got what it asked for. Unfortunately, all this happens at the expense of the tax payer (who might not know it yet).

(The letters on the steamroller, driven by Merkel, mean “IMF”)

  • At least the ECB seems to have given up on manipulating market prices since April (no more bond purchases). Enter the EFSF. They will now do the job.
  • The EFSF (European Financial Stability Facility) is a Luxembourg-registered private bank. National governments guarantee its debt (but tax payer has no control over it). The current “size” of EUR 440bn has not been increased. But now the EFSF will also have to purchase bonds and recapitalize banks. Banks being riskier than governments (due to leverage) this leads to a decline in asset quality.
  • The best of it all: the EFSF so far has issued only EUR 13bn in bonds[2]. It does not have 440bn at its disposal. To disburse any funds, it must find buyers for further bond issues. The current AAA-rating is supported by guarantees from its members (governments). The third largest guarantor is Italy (18%), the fourth is Spain (12%). So 30% of guarantees from members that might need bail-outs themselves. Even Greece, Ireland and Portugal are still among the guarantors (7%) of the EFSF – what a joke. But here, governments proudly point to the AAA-rating, thinking that this will let them issue debt without any problems. Until Spain and Italy get into trouble. Which they are.

  • Which brings us to rating agencies: The EU council actually had the impertinence of putting the following in its statement (paragraph 13): “We agree that reliance on external credit ratings [...] should be reduced, and look forward to the Commission proposals in this respect.” Now this is absurd. Blaming rating agencies for the crisis? That’s like blaming the insurance assessor for the car accident you had. So let’s get this straight: AAA-rating for EFSF is welcome, but junk-ratings for bankrupt countries not? Because it’s “unfair”? Let’s look at what happened when Fitch downgraded Greece by 3 steps to B+ on May 20 (something that was long overdue). The Greek Finance Ministry let out a statement claiming “the rating cut seemed to be influenced by intense rumors in the press at a time when Greece’s program was being assessed by its lenders”. And now here’s what Fitch had to say: “[...] the issuer [Greece] appealed and provided additional information to Fitch that resulted in a rating action which is different to the original rating committee outcome with respect to the rating.” In plain words: the Greek Finance Ministry didn’t like the rating and used all kinds of threats to make Fitch give a better rating. Now who is influencing whom? The market of course knows this and hence assumes a lower rating than the official one, leading governments to blame “speculators” for their fate.
  • Paragraph 5 in the EU Council statement points out that the bail-out for Greece is exceptional and a unique situation (don’t ask me why that would be the case). I have no idea why this was included, because it basically signals to markets that other countries cannot hope for same treatment. As the EFSF has not been increased, the more money is being paid out to Greece the less is available for others. Hence any Greek bail-out, by definition, hurts the others. It actually increases risk of a melt-down of the Euro-zone, instead of calming the waters.

  • Paragraph 9: Maastricht is back! (“Deficits will be brought below 3% by 2013 the latest”). One has to wonder why Germany and France pushed to weaken the 3%-criteria in the good times. Austerity only helps aggravating the situation in struggling economies (like Italy).
  • I have difficulties understanding the obsession with not allowing Greece to default (well, this was like a mini-default) and exit the Euro zone. Both will happen anyway, and Greece is a side-show. The main actors are Spain and Italy. Nothing, absolutely nothing has been achieved for them by saving Greece (and some banks). It is akin to someone emptying his fire extinguisher on his backyard grill while smoke starts coming out of the attic of his house.
  • Comic relief and headline of the year come from Athanasios Orphanides, Governor of the Central Bank of Cyprus: “Orphanides warns the country could need a bail-out after munitions blast” (a military ammunition depot recently blew up).
  • Finally – what about the success of Greek austerity? Wasn’t the payout of EU/IMF tranches supposedly linked to achieving “milestones” of budgetary improvements? In the first six months of 2011, the budget deficit (EU 12.8bn) overshot the target (10.3bn) by more than 14%. Public spending increased by 9% (due to, surprise, surprise, higher interest rates and payment of arrears to hospitals) while government revenues dropped by 8% (due to the recession).
  • Conclusion: The umpteenth Greek bail-out was really another bail-out for the banks (and the ECB). Wasting valuable tax payer money on a relatively small problem means there will be no money left when the real “elephant in the room” needs it: Italy.


[1] IMF Country Report No 11/175, pages 10, 55, by: IMF, July 2011

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rajat_bhatia's picture

Comeon Arseholes! Give us a deal! Fucking Bash Gold to the Smithereens!!

HungrySeagull's picture


There are not many like you. You stand unique in your failure to grasp the implications of what is happening between Europe and USA. If you are from India, why are you not screaming bloody murder about Iran and her actions towards your Nation or the recent discovery of billions in treasure at one of your temples?

You are a peice of work. Tone down the gold talk. We are not responsible in any way for your private decisions regarding money.

Central Bankster's picture

I miss the Junk feature- maybe add one that allows you to flag for persistent idiocy and bad market calls as well.

Central Bankster's picture

Lol another good call for the open on 7/24.  Keep "hoping" the gold price lower.

Captain Benny's picture

I think the biggest news re: Greece is the criminal organization ISDA trying to say that a default is indeed not a default.  For those of you that don't know what ISDA is, I highly encourage a read-up:

This is one of the organizations at the root of the problems in the marketplace for the last two decades.  Don't forget to listen to the Jim Rickards interview just this month where he talks about the idiots at ISDA:

(click on the image: "Listen to MP3" on the left side)

magpie's picture

Who has the balls to sue them ?

economists_do_it_with_models's picture

Calling a 'restricted default' NOT a default is like saying a female intern performing duties under your desk is not having 'sexual relations.'

These guys just make up the rules as they go and spin it however they like and never get held accountable for anything they say or do.

"Read my lips..."

What is the purpose of having a debt ceiling if you're going to increase it everytime it is about to get hit?

In other news, the rich get richer...

Ghordius's picture

"I have difficulties understanding the obsession with not allowing Greece to default (well, this was like a mini-default) and exit the Euro zone. Both will happen anyway, and Greece is a side-show."

The obsession above is about the fate of CDS contracts in general. They can't continue in this form, something's gotta give.

oogs66's picture

EFSF is not rated AAA.  Each tranche so far has been rated AAA, but each tranche has to be rated at the time it is issued.  Given all the changes on what EFSF can do with the money, there is no way it gets a AAA rating without more support from Germany and France. 

The exchange is all a bit weird and not sure it is clear yet how much is lost?

Negro Primero's picture



Fish Gone Bad's picture

There is absolutely no gold buried with anyone's teeth.  Have you seen how rich funeral home owners are?  A friend who used to work at a cemetrary used to talk about all the gold the people had there. 

AldousHuxley's picture

you forget that Hitler failed and there are still German Jews in Germany.

Sudden Debt's picture



Use of Weapons's picture

I have difficulties understanding the obsession with not allowing Greece to default (well, this was like a mini-default) and exit the Euro zone. Both will happen anyway, and Greece is a side-show. The main actors are Spain and Italy. Nothing, absolutely nothing has been achieved for them by saving Greece (and some banks). It is akin to someone emptying his fire extinguisher on his backyard grill while smoke starts coming out of the attic of his house.


My reading of the situation [and, freely admitted, it is one of less experience than many here] is threefold: firstly, it precisely allows Greece to still be the 'ugly stepsister' of Europe, and with a wink & a nudge, confidence is not drained from the Italian markets or further exposes Spain's housing bubble - in other words, Greece as the 'special needs' case (rather than symptomatic of the whole) is maintained as the PR cover story regarding the EU; secondly, it gives the EU time to prepare for the next crisis 1; lastly, this isn't really an economic issue, it is more a political one - thus Masstricht is mentioned - accepting the loss of Greece will be the first wave in a strong push to reduce the EU back to the old 'strong core' and lose the peripherals; this is politically unthinkable, because the long term view is that with Russia and BRIC ascension, the EU is going to need to be united to have any chance at keeping even half of the standard of living it has enjoyed for the last 50 years.2.

Feel free to cut that apart, but that's what I've taken from the German / banker response - oh, and yes. Trying out footnotes. They might be too wanky.

  • 1. for what? Well, how cynical do you want to be? For the US to sort out the debt ceiling? Or to fail? Or for the base PMs to rise enough to allow them to be leveraged against further lending... or for Iran to get dragged into the US exit strategy? EU area has around 11k tonnes, IMF has 3 it is sitting on - gold hits $2k+ then...
  • 2. The EU, after all, has already been through colonisation of the entire rest of the globe to get raw materials... after all, Germany still doesn't have oil
irishlink's picture

Spain and Ireland no longer have housing bubbles. We have CRASHED SPECTACURALY! Give us a few more years and we will be soo hated we will certainly be a buy! Then we can all sell our silver and gold and buy property and the great cycle begins again. My lucky children?

THE DORK OF CORK's picture

Can we get that reserve currency thingy  ? - what would the defecit be like with Italian like interest rates ?

Italy vs US: playing a different game -


AldousHuxley's picture

School House Rocks - Tyrannosaurus Debt (from SchoolHouse Rock makers of How a Bill becomes a law)

MolotovCockhead's picture

Think there's a mistake in one of the picture there! Shouldn't the Greece flag flying at half mast?

ISEEIT's picture

This article is shittin' funny enough to make me crap my shorts. I love the graphics in particular (cartoons are good).

PulauHantu29's picture

Good to hear it. Now may I go back to my Falafel and Oikos yougurt, please?

karmete's picture

Well done! Thank you very much for professional templates and community edition sesli siteler sesli sohbet

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