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OpenEurope Verdict On Greek PSI - Pyrrhic Victory Sowing Seeds Of A Political And Economic Crisis In Europe

Tyler Durden's picture





 

Minutes ago we presented Goldman's twisted and conflicted take on Greece in a post PSI world. Needless to say, virtually everything goldman says is to be faded. Which is why not surprisingly, the next analysis, a far more accurate and realistic one, does precisely that. In a just released report from Europe think tank OpenEurope, the conclusion is far less optimistic: "The deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default. This deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone."

From OpenEurope (pdf version)

A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory

Open Europe has responded to the agreement between the Greek government and its private creditors which laid out how much and under what format the country’s massive €360bn debt burden should be written down. The deal involved private sector bondholders agreeing to a 53.5% nominal write-down, while so-called Collective Action Clauses (CACs) will be used meaning that Greece is now technically in a state of default – precisely what EU leaders have spent two years trying to avoid. While marking a small step forward, Open Europe notes that the deal is unlikely to save Greece, and that the country is still on course for a full default in three years’ time, if not sooner.

Open Europe’s Head of Economic Research Raoul Ruparel said,

“With the use of CACs Greece has entered a coercive restructuring or default – something which Greece and the eurozone have spent two years trying to avoid. While the financial markets can handle the triggering of CDS that this will entail, at some point serious questions need to be asked over the amount of time and money which policymakers have wasted on what has ultimately amounted to a failed policy. Instead, Greece should have undergone a full restructuring combined with a series of pro-growth measures.”

“There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown. However, this deal could end up being a pyrrhic victory: the debt relief for Greece is far too small which means that another default could be around the corner, while the austerity targets are wholly unrealistic and kill off growth prospects. Furthermore, Greece’s debt will end up being almost completely owned by eurozone taxpayers and by exempting official taxpayer-backed institutions from the write-down, the deal has created a distorted, two-tier bond market.”

Breaking down the key figures

Greek law bonds (Total €177bn) – voluntary participation 85.8% (€152bn) – with CACs 100% (€177bn)

Foreign law bonds (Total €29bn) – voluntary participation 69% (€20bn) – CACs unknown (to be settled by 11 April)

Total private sector involvement (PSI) participation so far – with CACs 95.6% (€197bn)

Total level of nominal write-down achieved so far – €105.4bn (This is short of the €107bn assumed under the EU/IMF/ECB troika debt sustainability analysis, meaning that more foreign law bondholders will have to participate or not be repaid).

Money needed to push PSI through - €93.7bn

‘PSI LM Facility’ (Bond sweeteners for private creditors) - €30 billion
Bond Interest Facility (EFSF bonds to pay off accrued interest) - €5.7 billion
Bank Recapitalisation Facility - €23 billion
ECB Credit Enhancement Facility - €35 billion

Under this scenario Greece is getting a €105.4bn write down, but taking on at least €58.7bn in new debt straight away. The EFSF, the eurozone bailout fund, is also taking on a further €35bn (by issuing additional bonds) to ensure Greek banks can still borrow from the ECB.[1]

What will this deal mean for Greece and the eurozone?

  • The debt write-down offered to Greece is far too small to allow Greece any chance of recovery. Of the total amount (€282.2bn) that is entailed in the various measures now on the table to save Greece – through the bailouts and the ECB – only €159.5bn, or 57% will actually go to Greece itself. The rest will go to banks and other bondholders.
  • The use of CACs will almost certainly trigger the pay-out of Credit Default Swaps (CDS) in relation to Greek debt. Despite the opacity and secrecy surrounding the CDS market, there is little evidence to suggest that financial markets will be unable to cope with paying out on Greek CDS. Sellers of CDS have had plenty of time to prepare for this eventuality. Any who are not fully prepared or cannot bear the cost were likely taking irresponsible risks or have much deeper solvency problems.
  • Greek banks have taken substantial losses. These banks will be recapitalised, but ‘only’ by €23bn. In contrast, to meet the 9% capital requirements set by the European Banking Authority, Greek banks could need between €36bn and €46bn. It is unclear if further money will be forthcoming, but valid questions will continue to be asked about state of Greek banks.
  • For the most part, Greek pension funds (which held around €30bn in Greek debt) have seen their assets reduced significantly. Some public sector pension funds did refuse to take part voluntarily. But they are likely to be forced to do so by the CACs. Importantly, it is unclear where Greek pension funds will recover their money from – the political fallout of having to cut pensions would only add to social unrest.
  • The Greek government’s threat to default on the remaining foreign law bonds – held by bondholders who have refused to take part in the voluntary restructuring, hoping to be paid out in full – seems credible. However, since most of Greek debt will now be in the form of new bonds and EU/ECB/IMF loans (which do not have cross default clauses related to the old foreign law bonds), Greece can default on these old bonds without being judged in default generally or on the rest of its debt.[2]
  • The upcoming Greek elections at the end of April mean that the future of the second bailout package is still uncertain. The two main parties, New Democracy and Pasok, have been losing ground to both far-left and far-right parties. The hope is that these two leading parties will be able to form a coalition government with a clear majority in parliament. Even if they do not win the majority of votes, they may still have a majority of the seats due to the electoral structure in Greece. Even so, it will be a close run election and without a strong majority in parliament, every future vote on new austerity measures, of which there will be many, will be a hard fought battle – not conducive to political stability.
  • Under recent proposals, the total level of budget cuts Greece is expected to undergo stands at a massive 20% of GDP by 2013. Historically, no country has ever gone through such a large level of fiscal consolidation – successful or otherwise – especially without the option of currency devaluation. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled ‘only’ 10.6%.
  • Athens is highly unlikely to meet its debt targets by 2020. This means that combined with the poor growth prospects due to continuous austerity, Greece will almost inevitably need either another bailout in three years’ time, or be forced to default on its outstanding debt.
  • In parallel, the deal sets the eurozone up for a political row involving Triple-A countries. At the start of this year, 36% of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the voluntary restructuring and the second bailout, the share could increase to as much as 85%, meaning that Greece’s debt will be overwhelmingly owned by eurozone taxpayers – putting them at risk of large losses under a future default.
  • Therefore, this deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone.
 


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Fri, 03/09/2012 - 08:39 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

'Needless to say, virtually everything goldman says is to be faded'

Meeeeeooow! Plus you totally didn't capitalize either.

I don't mean to be crass but:  *cockclap*

Fri, 03/09/2012 - 08:46 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Crap....I thought we had this fixed yesterday.

 

No worries.....today we're rolling out the big package.

 

 

Fri, 03/09/2012 - 08:41 | Link to Comment PaperBear
PaperBear's picture

I wonder if the OpenEurope thinktank is a globalist entity run by Bilderbergs or CFR-ists ?

Fri, 03/09/2012 - 08:48 | Link to Comment Ghordius
Ghordius's picture

note that it's based in the UK and has a very eurosceptic point of view - this would not fit into the common perception of the Bilderbergers...

Fri, 03/09/2012 - 08:44 | Link to Comment Ghordius
Ghordius's picture

"The use of CACs will almost certainly trigger the pay-out of Credit Default Swaps..." And what if not?

Fri, 03/09/2012 - 08:48 | Link to Comment GetZeeGold
GetZeeGold's picture

 

 

Don't move.......or the dummy gets it.

 

 

Fri, 03/09/2012 - 08:52 | Link to Comment Ghordius
Ghordius's picture

every second comment I put this "BAN CDSs" reminder - but last weekend I was reading some old stuff and there was "Doing-God's-Work" Blankfein was once mentioning getting out of CDSs.

What if the Masters of the Universe are starting to realize that WMD-derivatives might be the best way to eventually get into prison or worse?

Sometimes fear works where sanity does not....

Fri, 03/09/2012 - 09:01 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

'What if the Masters of the Universe are starting to realize that WMD-derivatives might be the best way to eventually get into prison or worse?'

Because they answer to... um... ... yeah. Somebody for sure, especially in a global ochlocracy.

Fri, 03/09/2012 - 09:32 | Link to Comment JPM Hater001
JPM Hater001's picture

I liked this part: Any who are not fully prepared or cannot bear the cost were likely taking irresponsible risks or have much deeper solvency problems.

Um...duh.  The question is how deep does the rabbit hole go??? and who do you find at the bottom?

I think you find some well known Italian fellows and perhaps 1 or 2 from America.

Fri, 03/09/2012 - 09:24 | Link to Comment bdc63
bdc63's picture

Ghordius:  "And what if not?"

... Get the rat cage out! -- Winston is asking questions again ...

Fri, 03/09/2012 - 08:50 | Link to Comment disabledvet
disabledvet's picture

we'll know very soon. "after the close" of course. hmmm. "sounds like a tell" to me. As the Russians say "never have coup on Monday." Same goes for default on sovereign debt as well i imagine.

Fri, 03/09/2012 - 08:52 | Link to Comment Crash N. Burn
Crash N. Burn's picture

Financial porn? Everybody gets naked.

Fri, 03/09/2012 - 08:44 | Link to Comment Momauguin Joe
Fri, 03/09/2012 - 08:45 | Link to Comment Cdad
Cdad's picture

Therefore, this deal may have sown the seeds of a major political and economic crisis at the heart of Europe, which in the medium and long term further threatens the stability of the eurozone.

Great!  More meetings...it's just a case of a need for more meetings.  One year of meetings to get here, zero out some debt, change the definition of default [through a public perception campaign]...etc...was just not   quite   enough.

So let's go for another year pretending...and then another year after that...and maybe a decade of money printing, false "economies", made up equity catalysts, with deflationists fighting inflationists...because all of that...and anything you can possibly dream up...is better than THE TRUTH!

THE TRUTH...the "global growth" story, as told by the criminal syndicate called Wall Street...is a Ponzi scheme that has now concluded!  Get over it already!

Reset button already, bitchez!

Fri, 03/09/2012 - 08:49 | Link to Comment francis_sawyer
francis_sawyer's picture

"Don't you love farce?
My fault, I fear.
I thought that you'd want what I want...
Sorry, my dear!
And where are the clowns
Send in the clowns
Don't bother, they're here."

Fri, 03/09/2012 - 08:53 | Link to Comment disabledvet
disabledvet's picture

trust me: "you wanna be in these meetings now." here's a look at one right here:
http://www.youtube.com/watch?v=KS6f1MKpLGM&feature=player_detailpage

Fri, 03/09/2012 - 08:46 | Link to Comment ArkansasAngie
ArkansasAngie's picture

And to think that all that Greek debt got bought with newly pixilated imaginary money is the cherry on top.

By ... raising the overall money in the system ... they have successfully diluted the power of bond vigilantes.

It isn't just money that being transferred ... its power, too.

 

Fri, 03/09/2012 - 08:48 | Link to Comment Zgangsta
Zgangsta's picture

Better to sow the seeds of a crisis than to reap the fruit of one.

Fri, 03/09/2012 - 08:49 | Link to Comment disabledvet
disabledvet's picture

first off this is the first time i have heard of "the sweeteners"...let alone "seen the numbers in actuality." Second I note that Goldman cut Statoil to sell while Deutche Bank Upgraded it to buy. Third i really, really, REALLY don't think we're going to have to wait around too long to see the deleterious consequences of "bailing out your buddy" banking. stay long US equities. I especially like large US based industrial conglomerates (GE, IBM) and defense contractors like Lockheed Martin and Northrup Grumman.

Fri, 03/09/2012 - 08:50 | Link to Comment johnQpublic
johnQpublic's picture

why is it that every time i read something about greek debt restructuring these days, i can hear homer simpson in my head saying "heh heh heh, suckers"?

 

http://www.youtube.com/watch?v=CbB7IQxD7eY

Fri, 03/09/2012 - 08:55 | Link to Comment Nacho Libre III
Nacho Libre III's picture

Soooo .. guessing that this democratic outcome invalidates most of the CDS market and the instruments themselves? Will the next ingenious method of ripping off "smart money" be selling CDS on CDS?

Fri, 03/09/2012 - 09:12 | Link to Comment sumo
sumo's picture

All manner of methods are available, easy peasy.

CDS options, futures, options on futures; CDS index options, futures, options on futures; CDS volatility index options, futures, options on futures...

Then, for mom and pop, we have CDS ETFs, long/short, double long/double short, triple long/ triple short, all with options.

Then we have CDS mutual funds, CDS exchange-traded notes and receipts, CDS-backed securities ...

Fri, 03/09/2012 - 08:57 | Link to Comment Implicit simplicit
Implicit simplicit's picture

Who is shitting whom. With the unemployment rate around 50% in a basically socialist Greek society, they already know it will fail. This is all theatrics.

You don't like an outcome, write a new scene or software program.- the rule of law means nothing, Confication of wealth is -everything.

The US is no different-the rule of law means nothing- start a war without an act of congeress- no problem. The constitution means nothing

Fri, 03/09/2012 - 11:29 | Link to Comment AndTheRest
AndTheRest's picture

As I have stated before, this is about tearing down Greek culture so it can be rebuilt to be more compatible with the productive slave states of the New World Order.  A slothful people taking month long vacations, retiring at 55, and so forth is not what the neo-feudal elite of the New World Order are looking for.

 

No, they want American style slaves.  People who will show up to work on time at 8 PM and work a 12 hour shift selling hamburgers and french fries to drunks and stoners.  24/7 super markets.  24/7 drug stores.  24/7 fast food.  Go go go, 24/7 all day every day.

 

Siestas?  Try a 15 minute break every 6 hours.

 

Vacations?  LOL you have neither paid leave nor the savings to take a vacation otherwise.

 

All of the "lazy" countries will be torn down and rebuilt along Anglo/Germanic lines.  I.E. centrally planned fascist slave states.  Well, only the Anglosphere (which might as well be one empire) is truly fascist.  The Europeans are merely totalitarian and socialist.  For now.  Socialism inevitably leads to totalitarianism, fascism, and eventually the more brutal manifestations of these conditions.

Fri, 03/09/2012 - 09:02 | Link to Comment Vince Clortho
Vince Clortho's picture

"A small step forward, but the Greek restructuring deal could prove to be a pyrrhic victory"

Victory? In what frecking Bizarro world is what just happened in Greece any kind of victory?


Fri, 03/09/2012 - 09:04 | Link to Comment trampstamp
trampstamp's picture

Now that 80%+ of Greece CDS participation has bee removed from the picture, they can now default. Oldest trick in the book.

Fri, 03/09/2012 - 09:08 | Link to Comment dontgoforit
dontgoforit's picture

Politicians; freaking cowards.  Prepare for lucky 2013.....the end is nearer than we think.

Fri, 03/09/2012 - 09:14 | Link to Comment Dermasolarapate...
Dermasolarapaterraphatrima's picture

Does "Euro-KY" come in tube and bottle? Gel and liquid?

Fri, 03/09/2012 - 09:16 | Link to Comment dcb
dcb's picture

you folks make me laugh sometimes. from the start of the bond buying program of the ecb I have said all along that it would be too hard to ask the voters to pay directly for banking bailouts. so this is being done to transfer the need for the bailout to public institutions, then there will be no choice and the elites of couse will say if we don't do it sky will fall, can't have central banks fold. it was a set up from the start.

 

You have to realize the folks at the top are sociopaths, so you have to really try hard to think like them. they don't care if there is nuclear war, as long as they can't profit from it, or are safe in theuir deserted island with the mansion and domestic serving staff. In fact I'd guess they have plans in place to emerge and build everything new again and become even richer.

Fri, 03/09/2012 - 09:25 | Link to Comment marcusfenix
marcusfenix's picture

2015?

that's assuming the whole system, built upon paper, hopeium, and whatever information the ministry of truth decides is fit to print, makes it that far.

that's one horse I wouldn't bet bet on at this point.

mismanagement and malicious, psychopathic addict abuse have already done irreparable damage.

 the right/left paradigm players are throwing around statements on how this all could have been avoided...if only.

woulda'...coulda'...shoulda'

it's not important that we save this whale, it dead already, they're just printing air fresheners and dumping them by the ton on the carcase so not to sink up the beach, cause the serfs would defiantly notice a stinky beach.

what is important is what comes after, I just hope the collapse of the current system comes while there are still enough souls out their who can think and act independently of the imatrix. I encourage those I come across to learn how to build, garden, hunt and fish, not because the collapse will make food and shelter unattainable, but because those are the basic tenants of independence, the more you can do for yourself, the less likely you are to be a slave to the system that is designed to make you dependent on it.

and without our dependence on the system, it has no power over us, no control, and that is what it is all about.

power and control.   

Fri, 03/09/2012 - 09:25 | Link to Comment CEOoftheSOFA
CEOoftheSOFA's picture

It is incorrect to say that no other country has ever had 20 percent budget cuts. The US had a budget cut of 47 percent from 1920-21 after WW1. The US also had a 60 percent budget cut after WW2. Both resulted in an INCREASE in economic activity.

Fri, 03/09/2012 - 09:34 | Link to Comment taraxias
taraxias's picture

Bullshit.

Those budget "cuts" were a mere reflection of war spending ending. It bares no resemblance to the cuts that Greece is being subjected to today.

Push your card down the street, no one here is buying whatever you are trying to sell.

Fri, 03/09/2012 - 09:33 | Link to Comment PMakoi
PMakoi's picture

There are two Greeks standing on a corner, and one Greek says to the other, "How do you say 'NO' in Icelandic?"

Fri, 03/09/2012 - 12:00 | Link to Comment boiltherich
boiltherich's picture

There will be plenty of optimism in the corridors of power around the eurozone today, some of it justified – Greece has avoided a chaotic and unpredictable meltdown.

Say what?  So when the people rise up and burn the place down because of austerity, higher taxes and unemployment that will not be predictable or chaotic? 

And what other seeds have been sown by this? 

How about now that Greece got to essentially walk away from more than 80% of their obligations what do you think the other PIIGS will do?  Ireland has a referendum in a couple months to ratify the new treaty that makes all this bailing out legal, a no vote would essentially mean Ireland walks out of the eurozone and throw the whole mess into chaos again.  If the vote were held today it would not ratify the changes.  Unlike previous referendums with the Treaties of Nice and Lisbon there will be no revote till they "get it right" this time.

And Greece is not going to be repaying bondholders according to the original terms of their obligations, that means either banks will have to pay FOR Greece in the form of CDS, or the bondholders will take a huge loss.  This will have implications that go beyond the mere default of Greece itself. 

This will also make the sale of all future bonds by any government more difficult and more expensive, what Greece and the eurozone have really done is work out a blueprint for shafting investors that any government can use.  Changing the terms of the contract without the consent of both parties, use of retroactive (ex post facto) law, and for what?  They are deeper in debt now than last week, they are still stuck with an economy strangling euro appropriately valued for Berlin and Helsinki but not for Athens, and now the only loans they will ever get again will have to come from the ECB printing machine with more strings attached than the whole Pinocchio family combined.  They did not trade their independence away for competitiveness and a few euro, they sold Greece for what they already owed.

And the Axis Powers in all this?  What do they get out of it?  The entire multi year soap opera could have been avoided with a little printing out of the ECB but Germany and to a lesser degree France vetoed that because it would cause inflation.  Guess what Fritz and Louis, you still got all that printing and then some, and inflation is here not just for you but for the whole world, thank you!  And all the laws regarding debt union and monetary transfer were trashed in the process. 

All to save a currency that was at best a bad idea to start with, so OK, the Greeks fell for the scare tactics and threats should they have walked from the euro and a shotgun marriage to the Fatherland, I would not be as sure about the Irish.  Though if Ireland refuses to ratify the new treaty changes I do expect the rest of the zone to punish the Irish without mercy, because a no vote on the referendum will really be taking a huge dump in the euro soup pot.  But Spain and Italy will not be as easy to punish.  Nor will they be as easy to "save."  The Irish do have a couple of non zone allies, the US and Britain.  There are 15 times as many Irish Americans as Irish and Britain ruled Ireland for 800 years.  Not a happy union that but one they know how to work with. 

 

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