Summarizing The Open Questions Surrounding The Second Greek Bailout

Tyler Durden's picture

Think this time around finally the Greek deal is done? Think again. OpenEurope lists the "many" questions still surrounding the second Greek bailout that remain unanswered. We would add that this is hardly an exhaustive list, and believe the key question, to put it simply, is a CAC is a MAC? Because if the answer is yes, the deal is off.

From OpenEurope

Many questions around the second Greek bailout remain unanswered

We finally have an agreement on the second Greek bailout…in principle. It only took eight months. If you’re of the belief that a disorderly Greek default would have triggered Armageddon, the deal that was agreed (as ever ‘agreed’ is used loosely) by Euro finance ministers in the early hours of this morning is broadly good news.

Unfortunately, it is once again hopelessly optimistic and contains numerous gaps and unanswered questions which could still bring down the whole deal. This is nowhere outlined better than the damning leaked debt sustainability analysis (see here for full doc).

Below we outline a few key issues (not exhaustive by any means, there are many more) and give our take on how they could play out.

Greater losses for private sector bondholders: Reports suggest the Greek government was sent back to the negotiating table with bondholders at least four times during last night’s meeting. Nominal write downs for bond holders now top 53.5% (or around 74% net present value). The leaked Greek debt sustainability analysis (DSA) assumes a participation rate of 95%.

Open Europe take: 95%, really? We weren’t convinced the previous threshold of 90% with a lower write down would be reached and that was while potential ECB participation was still on the table. Although this target may have been agreed with the lead negotiators for the private sector, it is far from a cohesive group, diminishing the value of the agreement. It will be interesting to see how bondholders respond to the plan but we think that hold outs could well be more than 5%.

Greek ‘prior actions’: The deal includes a list of requirements which Greece must meet in the next week to get final approval for the bailout. These include: passing a supplementary budget with €3.3bn in cuts this year, cuts to minimum wage, increase labour market flexibility and reforms opening up numerous professions to greater competition.

Open Europe take: The now infamous €325m in cuts still needs to be specified. The huge adjustments to labour markets and protected professions mark a cultural shift in Greece – pushing these through will not be painless and could result in further riots.

Fundamental tensions in objectives of the programme: The DSA notes that the prospect achieving a return to competitiveness while also reducing debt is very small – the massive austerity could induce a further recession.

Open Europe take: As we have noted all along the assumption that Greece can impose massive levels of austerity and then return to growth in the next two years is a big leap and almost inherently contradictory. We’d also note that the cuts in expenditure in Greece are larger than have been attempted anywhere in recent memory (successful or failed). Likely to be substantial slippages in the austerity programme while the growth programme remains almost non-existent, essentially closing the book on Greek debt sustainability.

Further favourable treatment for the ECB: ECB and national central banks avoid taking losses on their holdings of Greek bonds but promise to redistribute ‘profits’ from these holdings so that they can be used in Greece.

Open Europe take: See our previous post for a full discussion of this issue. Markets still don’t seem too worried by suddenly being subordinated by central banks in Europe – they should be. This raises questions of the basic premise that all bonds are treated the same, based on who issued them not who holds them. As we’ve noted before, the whole concept of ‘profits’ is misleading, while any distribution would happen anyway – this is not a commitment from central banks but a further fiscal commitment by the eurozone (should really be included in total bailout funding).

Greece may not be able to return to the market even after three years: The DSA points out that any new debt issue will essentially be junior to existing debt, hampering the chances of Greece issuing new debt in 2014/2015.

Open Europe take: This point isn’t too clear but given that the eurozone, IMF and ECB will own such a larger percentage of Greek debt in 2014 any new private sector debt will be massively subordinated and at risk of taking losses if anything goes wrong with the Greek programme. Additionally after the restructuring the remaining private sector debt will be governed under English law and will have the EFSF sweetener – further subordinating any new debt issued to the market. Why would anyone want to purchase Greek debt in this situation (especially given the other concerns above)?

EFSF funding requirements: The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

Open Europe take: We’ve already questioned whether raising these funds so quickly can be done and whether the approval from national parliaments will be forthcoming. Even if it is the €35bn is said to fall outside of the €130bn meaning it is expected to be returned swiftly – given the uncertainty over how long banks will need these assets (as long as Greece as declared as in selective default by the rating agencies) this may be a generous assumption.

There is also no talk of the money to recapitalise banks. This is a risky strategy given that Greek banks’ main source of capital (government bonds) will have just been wiped out significantly. The needs were previously specified at €23bn, although reports now suggest they could top €50bn. It’s not clear where this money will come from or when it will be raised. The bond restructuring will be like dancing through a minefield for Greek banks.

We’re still trawling through the responses, analysis and documents to come out of the meeting – meaning there are likely to be plenty more questions and uncertainties to come.

The one thing that is clear is that even if this bailout is ‘successful’, it will set Greece up for a decade of painful austerity and low growth leading to social unrest, while the eurozone will have to provide on-going transfers to help it keep its head above water.

Sorry to be killjoys but as Dutch Finance Minister Jan Kees de Jager put it, the deal isn’t “something to cheer about”.

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Seasmoke's picture

Greece shouldnt be allowed to use that name any longer

falak pema's picture

Fleece land? Grease land...

clones2's picture

MSM already having to change their headlines this morning... from "Stock Markets up on Greece bailout"... already to "Stocks Weigh Greece News".... as the NAZ went red and the S&P is flat. Hahahahahahaha.

Going to be hilarious if the markets open slightly red...


trebuchet's picture

slightly red? Eurofinancials slipping, that extra haircut doesnt bode well. 

we are in such a mess, the only trade worth doing was the hopium trade, made tyou feel good that just maybethings get fixed. 


Now we got the reality of how fixed they really are   ....... NOT


So we gotto wait for more Good rumour, buy the rumour sell the news

falak pema's picture

oh when the saints go marching in to Athens burning..they well sing...what are these ashes worth?

Ashes to ashes...and fiat to fiat. Will WS burn after Athens and Lisbon and Madrid and Rome?

trebuchet's picture

Schauble commenting that he will make sure Greece implements........  hahhahaHaHA hA HAHAHAHAHAHA!!!!   


LongSoupLine's picture



Former banking executives, (now non-elected EU "leaders"), making decisions...


any questions?

MsCreant's picture

They are putting the "Stab" in Price Staabeeelaateee.

mc_LDN's picture

Its all Greek to me.

WonderDawg's picture

So, the agreement isn't an actual "agreement" yet. Big surprise. With so many open questions, this is a solution, how again? It just gets more absurd every day.

Hugo Chavez's picture

Greek banks and pension funds are not taking write offs are they? I thought they? I thought they got preferential treatment too.

chubbar's picture

Anyone taking odds on that little detail of passing legislation to cut minimum wage and opening up jobs to greater competition (think union busting) by next week?

FubarNation's picture

Out of the whole piece the thing that struck me the most was that Greece won't be able to issue new debt in 2014/2015.


I would think that is a big fucking problem.

Capitalist10's picture

If Greece is "saved", why is the Greek 1 year yield at a record 682% today?

machineh's picture

Probably, because it's going to be exchanged for package of bonds that take years to pay out. 

Not only is it getting haircut, but the principal payback recedes into the distant, dangerous future.


Capitalist10's picture

I think the supposed "fair value" of the 70% writedown/swap that is currently on the table results in a yield of around 500% for the existing 1 year bonds.

682% indicates that the markets expect a further kneecapping or an outright default, notwithstanding all the happy talk out of Brussels.

tabasco71's picture

to be honest, at that rate, I fancy a punt

williamsosa's picture

do you still think that is not clear where the money will come from ¨It’s not clear where this money will come from or when it will be raised. The bond restructuring will be like dancing through a minefield for Greek banks., 

the money will come from the ECB. where else.!!! that is the only source of money as of now. 


tabasco71's picture

Deal gets committed, world moves on. Able Greeks start to emigrate. Country gradually regresses into a semi-closed, dictatorial state.

trebuchet's picture

Albanians already leaving Greece in droves, as many youngster as poss looking to get out

Manthong's picture

“huge adjustments to labour markets and protected professions” .. “will not be painless and could result in further riots

                       -a bit of an understatement?

Allow me to rephrase..

"massive unemployment and dislocations across all segments of the population will be agonizing and result in chaos."

Jacks Cold Sweat's picture

Greeks would be better off by defaulting and leaving the Euro. It would become a tourist mecca and investors from all over the world would flood their markets seeking attractive investments. This is just to save the banksters at a terrible cost to the average citizen. But ,oh snap, the whole world would be f**ked up.

blindman's picture
Melanieeee - What Have They Done To My Song, Ma (Live)

Catullus's picture

Profit on the greek bonds?  There will be no market to mark them off so I guess they mean interest... so they're going to "re-invest" the interest to purchase more Greek debt (like Operation Twist).  That debt machine keeps on rolling.

Vincent Vega's picture

After reading all the latest "news" surrounding the Greek bailout; the term "smoke and mirrors" comes to mind.

mayhem_korner's picture



The Greek bailout deal is about as "done" as Dodd-Frank in 2010.

Element's picture

"... debt sustainability ..."  ... bitchez

mayhem_korner's picture



Latin translation:  servitudis perpetuous

Element's picture

how do you say, "...with a bonus free mud-hut!"

blindman's picture

here from fox news ! ?
Greece, Riots and Revolution to spread all over Europe ?
"Greece is at a standstill once again, with people venting their anger at more cuts, which the EU is demanding in return for vital funds. Greece appears to be just another failed state that fell for the lending schemes of the banksters. Best not to borrow another dime, declare independence from? the EU, bankruptcy to eliminate all current debt and start over.The EU crisis is all a buying opportunity created for the international bankers . A lot of great European companies are now even more under valued than they were back in 2008 and the bankers are ready to buy Europe's assets for pennies to the dollar .The Police and Politician cannot possibly understand the anger of a "no future" generation, or the anger of those who have played the game by the rules and ended up with nothing.!! And it will get worse. Banks are not lending and reactivating the economy. Meanwhile, the 1% is in the process of violently assaulting the historical rights of working and middle classes - even? at the risk of losing what's left of their political and social legitimacy (they don't care anyway)" site comment

flyme's picture

Greyland, since all the young people will leave.

machineh's picture

The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

THIS I have to see! An auction for the ages! 

Hope it's broadcast live like the Super Bowl, so we can throw an 'EFSF auction' party.

(I'm backing the bond vigilantes in the betting pool.)

BlackVoid's picture

I think people who think that a disorderly default will be allowed are mistaken.

THERE IS NO LIMIT TO KICKING THE CAN, if "kicking the can" can be done by printing money, cheating, disregarding the law. Whatever. If it can be papered over, it will be papered over.

There will be no banking collapse (or any other collapse for that matter) before either of the following happens:

- there is a serious, real, physical oil shortage
- there is a massive public confidence loss resulting in bank runs and/or runaway inflation

Forget it. They will PRINT AND LIE, there is no limit to printing or lying and nothing will happen while the majority belive the lies. If if it is for a few days / lie. There is always a new lie.

Counting the losses even if it is primary school math is totally useless. IT WILL BE PAPERED OVER. I REPEAT: ANY LOSSES OF ANY TOO BIG TO FAIL INSTITUTION WILL BE PAPERED OVER.

Element's picture

especially if Mr Rothschild were to chip-in ... oops ... sorry, ... I meant to say the FED ... doh!

Catullus's picture

Wait until people figure out that the notionals on Interest Rate Swaps are significantly larger than the Credit Default Swaps.  That $700 trillion time bomb isn't triggered on default.  It's triggered on rising interest rates in general.

djsmps's picture

I don't understand anything about finance I guess. I thought the goal was to make money. From CNBC:

The agreement by private sector holders of Greek government debt to take losses of 53.5 percent as part of the 130 billion euros ($172 billion) second bailout will actually see real losses of more than 70 percent, Charles Dallara, managing director of the Institute of International Finance told CNBC. “When investors get over the net present value loss, just north of 70 percent, this will be quite attractive. I am quite confident that most investors will find this deal an attractive one and of a high level of participation."

AU5K's picture

another question is where is the greek economic growth, key to returning to 120% by 2020, supposed to come from?


Are more islands going to suddenly appear in the sea, for tourists to visit???


The debt to gdp curve will never bend back as the hope case requires.

BlackVoid's picture

"We’ve already questioned whether raising these funds so quickly can be done and whether the approval from national parliaments will be forthcoming."

Speculating about stuff like this is totally useless. THEY CAN RAISE FUNDS BY TYPING ZEROES!!! It can be done in 10 seconds. Is that quick enough? No approval is needed, because if they cannot do it in the open, they will do it behind the curtains.

MsCreant's picture

Relax Neo. It's always shocking when you first disengage from the matrix, all those needles and tubing hanging from you. We'll get you some gruel and clean you up. It will all be okay.

chindit13's picture

Assuming all parties are browbeaten into agreeing with the crumbs negotiated, we will be back to needing Greek growth to make it all work.  Absent some dramatic and innovative changes to Greek society, however, growth over the near term is unlikely.  I’m no Goldman Sachs, so the only things I can think of to help the Greeks make money are what follows:

1) NPV the future stream of residual earnings on the Kojak Collection, starring Telly Savalas, and sell them as CDOs

2) Sell rights to the five Olympic rings to corporate sponsors

3)  Install luxury boxes around Syntagma Square so that foreign tourists can view the riots in comfortable surroundings while noshing on dolmadakias and tzatziki

4)  Trademark the term “Greek Style” and charge a user fee for anyone journeying up that particular path

5)  Dig up the corpse of Aristotle Onassis and have it marry Kim Kardashian on pay-per-view;  she’ll do it for the attention, and he won’t mind…she’d even consumate the marriage if it could get on network prime time

6)  Borrow from Greek-American Nicolas Cage, who is at least as solvent as most of the big Eurobanks

7)  Cut the -opodopolous off everyone’s family name and sell the carbon credits resulting from the use of much smaller business cards

8)  Offer to fight the Persians again on behalf of Israel and the US Neocons

9)  Get hired as a financial consultant to the governments of Portugal, Spain and Italy, sharing your new-found wisdom

10)  Threaten default again and sell CDSs on yourself

MsCreant's picture

Nice list. See you at Syntagma Square...

Forgiven's picture

>70% loss option is 'attractive?'  What are they smoking?  Bondholders have zero to gain from this deal.  Many are probably better off letting this default and CDS' trigger.

Element's picture

8)  Offer to fight the Persians again on behalf of Israel and the US Neocons


I hope you realise there are now people teleconferencing furiously to discuss such a debt-sustainability option.