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Q&A On The Greek Restructuring, And Why It's All For Nothing
Lots of questions, and unfortunately, answers, from UBS in this Q&A on the Greek default/restructuring, much of it already covered previously, but the only one that matters is this: "Would the restructuring make the Greek situation sustainable? No. Sorry, but no is the answer. Even with full repudiation of the Greek debt, the situation would not be sustainable. In that event, the deficit would move to the primary balance, 5-6% last year. Not sustainable. And the current account deficit would be in the high single digits. Not sustainable either." So you're telling me there's a chance?
Q&A on the Greek debt restructuring
The IIF and Greece are approaching agreement on the Greek PSI, according to latest reports. We believe collective action clauses will be used to force a high participation rate, which means that credit default swaps will be triggered, but also that the ECB could be forced to take a loss. We look at the implications.
When?
20 March is the deadline.
The next major debt repayment Greece faces is a €14.5bn bond redemption on 20 March. In all likelihood, the Greek government will not have the cash to repay the bond, which means this is in effect the deadline for restructuring the country’s debt.
There are two scenarios in which talks could nonetheless carry on after that date. First, if our above hypothesis is wrong and Greece does in fact have the cash to repay the maturing bond – we doubt this is the case. Second, if Greece receives external support from the IMF and/or other European countries. This would be akin to the Fund and/or European states bailing out investors – again, we doubt this will happen.
So, if the debt is not restructured before 20 March, Greece is very likely to default.
Is Greece on an IMF programme?
No, it is not.
The IMF adjustment programme launched in April 2010 was formally terminated in December 2011 with the payment of an €8bn tranche. Greece is therefore no longer under an IMF programme at present. A second programme will commence after Greece’s debt has been restructured. One key reason for the timing is that two-thirds of the money from the first IMF bailout was used to repay existing bonds maturing; only one-third was actually used to support Greece. Restructuring Greek debt will reduce the proportion of the bailout package used to repay maturing bonds. The IMF actually has an incentive to back a solution in which the new bonds are very long (no redemption in the near future) and carry very low coupons, at least in the first few years (no debt service).
What haircut?
About 70%.
In our view, a simple haircut – just reducing the value of the debt – will not work, as it would result in an insufficient reduction of the debt (please see our note “Why a 50% haircut on Greek debt will not work”, 14 October 2011) Rather, we think the debt will be restructured with existing bonds exchanged against new bonds with much longer maturities.
Sources close to the discussions are talking about 30-year bonds, whereas the initial offering in September proposed 15- and 20-year bonds. The new bonds could also offer a lower coupon, and potentially step up later, or the coupon could be indexed to Greek GDP. Assuming the usual 9% discount rate, which was used in the first version of the PSI, we would assume a haircut in the neighbourhood of 70%.
Will it be indeed “voluntary”?
We doubt it. We think CAC clauses will be imposed.
The current talks between the IIF and Greece seem to be nearing agreement. But even if an agreement is reached, we very much doubt that the participation rate of investors in a “voluntary” haircut will be high. In the first PSI deal, the Greek government wanted at least an 80% participation rate, and this would indeed be necessary to be consistent with the opening of a second IMF package – hence the likely need to force investors to participate.
Although there are a number of ways to force a higher participation rate, we believe the most likely option will be to use collective action clauses (CACs). Because more than 90% of Greek debt is under Greek jurisdiction, these CACs would retroactively apply to existing bonds, and hence drive the participation rate up to 100%.
Will CDS be triggered?
Yes, if CACs are imposed.
If CAC clauses are indeed imposed, the exchange of bonds becomes coercive for a number of investors. This would almost inevitably trigger credit default swaps.
According to the ISDA, net open positions in CDSs are about €3.3bn currently, and we do not see that as a major risk. By contrast, not triggering the CDSs would wipe out the credibility of this market, which would be very detrimental, in our view. Triggering the CDSs is the right decision.
Will the ECB participate in the haircut?
If CAC clauses are used, we think the ECB will li kely have to participate and take losses.
The official narrative for the time being is that the ECB will not be involved in the PSI. However, if CAC clauses are used, we think it will be difficult for the ECB to avoid involvement. There are several ways of doing so. For instance, the ECB could exchange its portfolio of bonds against a new Greek bond, then Greece could propose a coercive PSI on all bonds except the one held by the ECB. This would, however, be very questionable from a legal point of view and would almost certainly be challenged in court by investors.
Another option would be to transfer the ECB’s portfolio to the EFSF or some other European entity, which then would be involved in the exchange. This option again is fraught with legal complications.
A further legal consideration is that the ECB might be forbidden to participate in a haircut as this could be seen as a breach of the Lisbon Treaty, specifically the clause preventing money financing of government. We do not think this is a valid argument, however.
What are the potential losses for the ECB? Could it cope?
About €22bn. And yes, it could cope with that.
We estimate the ECB holds close to €55bn of Greek bonds. So a haircut of 70% would reduce the value of the bonds by €38.5bn, to €16.5bn. However, the ECB did not buy these bonds at par; we believe the average cost was around 70 cents, hence the ECB spent €38.5bn on buying the bonds. After any exchange it would receive bonds worth €16.5bn – a €22bn loss.
This looks like a lot of money, but actually the P&L of the ECB is likely to look much better. Firstly, because the ECB’s Securities Markets Programme (SMP) will generate a large carry trade. Assume that the SMP ex-Greece averages €200bn this year. This is a conservative assumption; indeed, the SMP currently amounts to about €180bn (the official €220bn minus our estimate of €38.5bn in Greek bonds). Now assume this portfolio yields 6% – again, arguably a conservative hypothesis – then the ECB would gain €12bn this year. And that is not all. Repo operations currently amount to about €900bn, and banks are paying 1% on those funds – a €9bn profit for the ECB this year. This number should be lowered, though, because the ECB deposit facility of about €500bn receives a 0.25% return, which costs the ECB €1.25bn a year. So the real profit would actually be €9bn minus €1.25bn, i.e. €7.75bn.
We again stress that these are extremely conservative assumptions. Expectations for the next three-year repo operations are for several hundred billions of euros, which would boost the ECB P&L. But using our numbers, the ECB’s P&L from monetary operations would be a €22bn loss on Greece, minus the €12bn profit on the SMP portfolio, minus the €7.75bn from repo operations, leaving a €2.25bn loss – ten times lower than the original number.
Not convinced yet? Let’s look at the ECB’s balance sheet. Strictly speaking we should be referring here not to the “ECB” but to the “Eurosystem”; indeed, the SMP has been implemented by the ECB at about 8%, the rest is implemented by the national central banks pro rata, in line with their share of ECB capital. So the loss proceeding from a Greek restructuring will be borne not by the ECB alone but by the entire Eurosystem. The table below summarises the Eurosystem’s balance sheet. This is important, firstly because of the last line at the bottom of the liability side, “capital and reserves”. Many commentators compare the potential losses with the capital of the ECB, which is €6bn, while it should actually be compared with the Eurosystem capital, which is €81bn.
Also, the line just above “Revaluation Accounts” is also interesting. This account is used to book the capital gains from assets; for instance, gold is marked to market regularly, and any increase in gold value on the asset side will be compensated by an increase in the “Revaluation Accounts” line. So this account should be regarded as latent profits, and can be used to offset losses.
The number on this line is a far from negligible €383bn, considerably more than any estimates of potential losses from a Greek restructuring.
We would note an important detail, though: the accounting rules are complex and not all of the losses can be offset by latent profits, so only part of the Greek losses might be absorbed by this account. We do not have sufficient granularity on this account to push our analysis any further.
Should the ECB participate in restructuring?
If the ECB participates, it would be a bad decision. If the ECB does not participate, it would be a bad decision. On balance, we think the ECB should participate.
If the ECB participates it will lose money together with the national central banks. This might be politically difficult to sell to voters, especially in some countries. It could then reduce the appetite of the ECB to use the SMP, or it could increase public pressure in some countries to avoid putting central banks further at risk. The second risk is more legal: if the Bundesbank loses money on the SMP, it is ultimately taxpayers’ money. This is where a legal problem could arise. In September, the German constitutional court clearly ruled that any taxpayer involvement has to be approved by parliament. This has not hitherto been the case for the SMP, as its use is decided on by the ECB board. Hence the SMP could be considered to be in breach of the constitutional court’s ruling.
Needless to say, this would be unsettling for markets.
If the ECB does not participate, then the bonds held are senior to the market. This means that almost €200bn of Italian and Spanish bonds purchased via the SMP would be senior to the market: in effect, the market would have just been downgraded. This is clearly not a message that should be sent out while Italy and Spain are facing heavy issuance schedules. Additionally, if the ECB indeed avoids involvement in the PSI, we think there is a high probability that this would be challenged in court – which would put the ECB in an unpleasant position.
On balance, we think the ECB should take a haircut. The constitutional argument is not compelling, in our view, and the losses, as explained above, are not that large. By contrast, downgrading the market to junior to the ECB could cause considerable damage and would make any SMP intervention selfdefeating.
Would the restructuring make the Greek situation sustainable?
No.
Sorry, but no is the answer. Even with full repudiation of the Greek debt, the situation would not be sustainable. In that event, the deficit would move to the primary balance, 5-6% last year. Not sustainable. And the current account deficit would be in the high single digits. Not sustainable either.
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LOL @ Jim Carrey
Epic! and sadly so true.. as I laugh!
Nice hooters!
Azag Toth howls.
I couldn't get all the way to the bottom. All I got out of each paragraph was...
If this we fuck these guys if that we fuck those guys... It the other we fuck everyone...
I chose to get it over.
They are priced in too :)
"we got no food, we got no beer, out pet's heads are falling off"
Holy shit, check this out if you plan to trade next week: http://bit.ly/jmgPLz I would not touch NG even I was Arnold Schwarzenegger.
ha ha, to think western civilization is based on the Greek model
Thus why the Spring equinox will be, as it always is, a "turning point". The Illuminatti uses natural events to trick the mind into panicking when it would usually be rejoicing, or trick the mind into rejoicing devil worship instead of celebrating natural events. May 1st has always been an important day for us, as it is a celebration of spring (just like March 21st), but last year the Illuminatti turned into into a celebration of death.
This death cult steals the mind and thus slits the throat of the soul of humanity. Of course, this is a long way off from most people's understanding, when the debate of choice is "which fascist President should we have for the next term?"
Nothing better than a cold beer and another episode of 'Tyler Durden and the Cheerleaders of Doom'. Love it. Best show on the planet.
Ra! Ra! Isis and Horus! Goooooo Team!!!!!!!!!!!!!
KlausK..
We're laughing at you. Dress up in a clown suit and hire a monkey to support yourself. Report back your quarterly earnings to the ZH community. Government subsides don't count in your bottom-line profits. Winks!
Relax. I'm considering myself a cheerleader, too. Can't wait for this whole mess to collapse.
My apologies
Well then, a little interim entertainment slave:
http://www.youtube.com/watch?feature=player_detailpage&v=cfKkG_dPvVo
And the super sexy version
http://www.youtube.com/watch?feature=player_detailpage&v=rkFf1SxHgSA
slow asphyxiation.
Not sure if Tyler ever posted this. I found it funny, so will you.
http://www.europe2020.org/spip.php?article719&lang=en
GEAB ... god ... euro nut-jobs r us ... at least they read zh
The EU will probably start paying whatever part of the upcoming Greek bond redemptions that Greece can't pay, and charge them next to zero interest on some sort of new long term bond.
Similar to our fed buying T bills at close to zero interest.
This kind of game can go on for a very long time.
Japan has mastered it.
So basically, Greece needs full-on austerity in addition to repudiating all government debt. In other words, Greece is going to have a civil war.
How can "extend and pretend" not be an option anymore? What planet are we living on?
Everything will change if the ECB (backed by Fed) and all national central banks don't direclty kick the can down the road at a full 100% bailout. Any haircuts, any at all, changes everything. It means that the old way of doing business and all the old assumptions are no longer operative.
I agree with just about everything said here. The bigger question is does anybody care about Greece at this point?
Well...if blowing up a country is Wall Street's responsibility...who's responsibility is it to put it back together? (that would be the not irresponsible part of the USA I imagine.) oh how the world loves American intervention! I'm sure those Generals are just pounding the table to "go, go, go" given the lack of anything going on these days.
How did Wall Street blowup Greece? The Greeks blew up Greece. Now, the entire world is trying to put it back together. IMO, they should simply be left to their own devices. A Greek default is meaningless at this point.
Double Post.
After all is said and done the Greek situation would not be sustainable. No is the answer. Well, what then makes it "sustainable"? What made Britain, Finland and Sweden (among others in Europe) in 1992/93 sustainable? It was the same medicine that Thailand, Russia and Argentina took 5-10 years later - a competitive devaluation.
Can Greece take now what it should take? Like Socrates took 2500 years ago, the honorable way out. No, they can't do that within the euro. So, they have to exit. Do it the Latvian or Estonian way (internal devaluation i.e. lowering salaries by xx%) is out of the question since those smaller countries had a lot less debt, so they could escape the most horrible debt deflation symptoms.
Greece must leave the euro.
From financial discomfort to great comfort.
Once upon a time, there was a purchasing agent at a prosperous company.
He visited relatives in Italy, then drove over the border to open a private account at Credite Swisse. The arrangement included a coded identity and agreement that anyone could deposit funds into his account upon presenting a secret code and a secondary account number.
Anyone could deposit without knowing the actual private acount number; Withdrawals were possible only by s/o with the coded identity and actual account number.
Back home, our purchasing agent arranged for more than 1 vendor to enjoy both hugely profitable sales and make deposits at CreditSwisse.
Yearly, he travelled to Italy/Austria/France, crossed the border and checked status of his account. And smiled. And returned home.
He enjoyed his job. He was a loyal and trusted employee. He retired early.
Buddy, you'll never know how many Risk Managers play likewise...always with OtherPeoplesMoney which always is tied to his own income in mysterious ways rarely made known to others.
And the smart banker, always, puts bennies [benefits] into the back pocket of his large depositors. And always receives bennies from placing funds [loans of OPM] into enterprises very "friendly" to him.
The bank, itself, be damned, except as a conduit for his personal income. Exception is made only for a banker who actually owns the bank and its equity.
1 in a million ...... Who uses millions any more.....really dates the movie ...(sarcasm)
Obviously ( I hate that word too), the laws don't 'verk' anymore. So the solution will be that they change the laws. They don't care because they understand that the system to date is such a disastrous clusterfuck of confusion that even they don't comprehend it.
Central planning 101 should open with the statement that:
What you are about to learn is that we are full of shit and only wish to have you attempt to do as we have done, so as that when it fails, we can blame you.
THE END.
Are you in or are you out? That's all I need to know, Bud! http://bit.ly/jmgPLz
Your latest IMF fuckstick. Explaining the west communist dependence and new policy measures to continue keeping the USA revenue checkbook in the black.
Strengthening the Asia/IMF Relationship in a Highly Uncertain Global Environment
"Thank you gentlemen and now that I have our attention, you will see that we are in a room full of shit. This here is cow shit. Here's some horse shit........a pile of chicken shit. Hey who let the Frenchmen in here? Moving on then, here's a huge bloody pile of elephant shit, some lion shit, human shit, rat shit, cat shit and bat shit............in other words shit all over the place. It is your job to navigate this room, yes you will step in shit.........a lot of shit, but you get to choose which shit you step in. Now get to it, and try not to stink up the rest of the house."
Hello A Lunatic CUNT
You really have no idea about the WTO do you? I can repost during the Thailand rice crisis. It was something everyone was told to buy. Then the flood occurred. I never bought into the WTO committee tip. WTO is going to have to answer on this insider trading soap opera.
http://www.wto.org/english/forums_e/public_forum_e/public_forum_e.htm
If your ZH ass is not puckering, then you're not part of WTO scheme. If you're involved.. we already know who you are.
I think perhaps you may have me confused with one of the many imaginary demons that rage inside your noggin. Please take your lithium.
Make sure you show up at your parole officer tomorrow. Your appointment is at 10:00 sharp. Don't be late! You have to pee in the cup, your government check may stop in four weeks if we find you positive. We cannot afford your lifestyle any longer. 10:00 sharp A Lunatic.
"net open positions in CDSs are about €3.3bn currently"
That seems really low.
i have no idea about that but the
balance sheets in the financial sector
can absorb all and any infinite losses
and deficits. it's the system. the problem
is the economy and people are a different story
cause they have to pay the interest on this
money creation to infinity scam we call fiat
money and associated dealer side scams.
it was not devised to make sense, only money.
contagion cometh
http://jessescrossroadscafe.blogspot.com/
Corzine Sued for RICO Violation by MF Global Customers
By Linda Sandler
January 20, 2012, 6:42 PM EST
..
"..the suit, filed in federal court in Manhattan today on behalf of Robert Marcin and other MF Global segregated account holders by Grant & Eisenhofer PA of New York, is one of at least 10 against Corzine and other MF Global executives. Plaintiffs including the Virginia Retirement System have been competing to lead a consolidated lawsuit seeking so-called class-action status....
Read the rest here."
Almighty Zeus himself will unleash his mighty lightning bolts from atop Olympus and strike down the nay sayers - either that or the EU will bitch slap them and tell them to suck it up.
http://www.youtube.com/watch?v=rtiZfUO8_us
SNL. Black Swan
Tic toc, isn't it like past Midnight in Athens? Are these jerkoffs still on the phones negotiating? I bet not, midnight is for hookers and blow! Kaboom bitches!!!
There's nothing more to negotiate. IMF/Germany want a 3.5% coupon. IIF wants 4%. No side is willing to move.
I could have read the whole thing but I'm late for a luncheon in Davenport.
Finally. Thx Tyler.
And I feel that Plunge Protection Team (JPM + BAC + C+ MS + GS trading desks) has almost run out of money. They were hoping to lure some suckers on some idiotic not news from greece, but at this point if they want to make money on their main source of income which is transaction fees, they'd better throw everything in and crash the market as they've done 6 times so far at SP bottoming at 1100. Six freaking times. This time, I feel all institutional suckers are off, they learned the game.
Right after the Fed meeting on Wed, 2pm, the crash could start.
Hopefully that group will start eating each other or fucking each other in the ass for a change instead of the Citizens of America and the Good People of the World. It is passed the time for these pricks to start canibalizing their own PPT because that is all that is left in this sorry sloppy shitty mass of crap called a "market".
Thesse fucking assholes, geees! These are the people that eat and throw their own poop.
ditto
If Greeze was a horse, I'd shoot it.
greece can't pay any of it back. get the point?
Mark my words. March 20 will be ABSOLUTELY NO NEWS.
They will attack Iran before that. That will be the news so they blame everything on Iran.
Iran is a hype. The Iranians know that the Western press creates hypes and they play with it. No Iran-crisis.
We'll see. Check news right now about European meeting tomorrow.
Three reasons:
- Nuclear risk is clear
- There's a lot of ammunition that has to be used
- Anything to avoid attention on the defaults and blame Iran for the market crash would be used.
"Rather, we think the debt will be restructured with existing bonds exchanged against new bonds with much longer maturities."
Exactly. No (significant) losses for the bondholders; they simply get a pile of fresh long term bonds. Problem solved. No collapse, no CDS-trigger, no credit event. A non-event. Bye bye Kyle Bass.
Are you out of your freaking mind? Are you out of your freaking mind?
Even if that happens, it is still UNSTAINABLE for Greece to keep paying the debt without TORTUREOUS AUSTERITY. And my man, Balkans are totally different. Do you know the term "Balkanization"? Look it up.
Exactly. Europe can just print some money. Problem solved.
Just print and there will be no consequences, ever. Trust me.
So. What's Greece going to do to make good on its debt, then? Will it have to suck dick at a truckstop?
It's not Greece's fault. It the fault of german banks that lent money to Greece knowing really well Greece was not capable of paying.
German banks must take the loss and get nationalized, which seeing the rumour about Comerzbank and Deutschebank, it may happen before March 20 greek payment deadline.
If your bank comes to you and begs you to lend you 1 million dollars at low interest, would you accept it, use or move the money and declare bankruptsy? I would. Anybody would.
b-dog give up cypress? I wonder if turkey has a hand, in this game, and is northern cypress donmeh?
I think a white knight will arrive in time with the cash for Greece to make that €14.5B. Maybe it will be the US, the EU, or the BRICs; probably a combination of all three.
Just for shits & grins:
1) The US & EU share of my imagined bail-out is 2/3 = €9.666 Billion
2) Greek daily oil imports(2008) = 520,000bbl
3) Greek yearly oil imports = 189.8 Mbbl
4) Brent = €85.30/bbl
5) Greek oil imports annual costs = €16.190B
6) Iranian share of Greek oil imports = 60%
7) Cost of Iranian oil imports = €9.714 Billion(Close enough for gov. work)
Conclusion:
www.I_should_have_been_an_economist_with_a_blog_to_pimp.slobspot.com
Happy New Year, Equinox and Year of the Dragon.
This year's gonna be a blast.
http://www.youtube.com/watch?v=usdcpWXPaDY
Why should Greece or any of the other PIIGS pay back the debt? Just tell the German and French bansters to stuff it.
Or "Sorry, we spent all the mney and was fun while it lasted,"
Or laugh at Merkel and Sarkozy and tell them, "We were fools for taking the money, you were bigger fools for lending to us!"