UBS Kills Latest European Bailout Proposal: "Why A 50% Haircut On Greek Debt Will Not Work"

Tyler Durden's picture

UBS' Stephane Deo has rapidly become of one of the most vocal, and luckily most erudite, critics of the veritable rumor-a-palooza that Europe has become: a continent that is now desperately throwing anything and everything at the wall in hopes it will stick and generate another intraday EURUSD short covering squeeze to perpetuate the illusion that Europe is viable for at least one more day. His note today effectively puts an end to the most current approach whereby Greece will see a 50% haircut on its debt (the 21% haircut proposal from July 21 is now dead and buried as we had suggested back then). With that, he forces Europe back to the drawing table to come up with a plan that is endorsed by the market, with just 9 short days until the Eurogroup Summit on October 23 at which point kicking the can into the future will no longer be tolerated and the market will finally judge Europe not for promises, rumors, lies, innuendo and hyperbole, not necessarily in that order, but on actual decisions and policies. Alas, if the 50% haircut idea, which is now proposed by Germany (in diametrical contrast to a month ago), and staunchly opposed by France whose banks, unlike Deutsche Bank, have not been able to dispose of legacy exposure, is killed before it is even implemented, look for a spike in panic in Europe which will now have to redo everything from scratch.

As to why Herman Van Rompuy should be panicking, here is Deo's summary:

For more than a year we have argued that Greece will not be able to avoid a default. In this piece, we look at how this could be done. We think a 50% haircut makes little sense: if we take into account the lenders that cannot participate in the haircut (IMF, bilateral loans) and the bank recapitalisation it would trigger in Greece, we find that a 50% haircut would actually reduce the stock of debt by only 22%. Rather, we think a large restructuring of the debt (i.e. a “super PSI”) is the solution. It would reduce the financial needs of Greece, postponing for decades the redemption of bonds. It would also cut the deficit if coupon payments were reduced sufficiently. This would come with manageable needs for bank recapitalisation. Finally, such a step would remove the need to default, or rather, it would be akin to the default we expect.

He continues:

why a 50% haircut does not work At the time of writing, Greece has total debts of €346.4bn. About a third of this debt is in public hands (34.8% is attributable to the IMF, ECB and European governments), roughly another third is in Greek hands (28.8%, essentially for banks) with the remainder (36.4%) held by non-Greek private investors.

The problem with the above is that some of the debt cannot be included in a haircut. This is almost certainly true in the case of the IMF debt. It has been suggested that the IMF debt could actually be included in the restructuring, but this would be unprecedented and we attach a very low probability to such a decision. Similarly, the bilateral loans are de jure pari passu, but we think it is nevertheless difficult to envisage a haircut on that part of the debt.


More debatable is the ECB case: the ECB has not been party to public-sector involvement (PSI), as it was a “voluntary” exercise and the ECB did not volunteer. However, in the case of a coercive default, it would be legally difficult for the ECB not to participate. Hence, in Chart 6 below, we provide two simulations: one with ECB participation and the other without ECB participation. In the case of ECB participation, if we assume the ECB holds €55bn in Greek bonds, and has purchased these bonds at an average of around €¢70, it would mean that a 50% haircut would leave the ECB with a loss of about €11bn.


Last, while the Greek banks would naturally be subjected to any haircut, the difficulty is that they are undercapitalised. According to our equity analysts, Greek banks currently have a core tier 1 ratio of around 8% (Marfin Popular Bank – 8.6%, National Bank of Greece – 8.5%, Alpha Bank – 8%, EFG Eurobank Ergasias – 6.4% and Piraeus Bank – 7.2%). This means that any haircut affecting their debt portfolio would push their capital lower and trigger the need for a recapitalisation. Consequently, every euro saved by the government on its debt via the haircut would be injected into the Greek banks. This is equivalent to having the Greek debt in Greek banks excluded from the haircut.



In short, as shown in the above chart, a 50% haircut effectively equates to a 22% reduction in existing debt once the banks have been recapitalised. This is far from enough. Or, to put it another way, to achieve an actual 50% reduction in the debt, Greece would need to implement a 100% haircut, i.e. repudiate its debt totally.

And just when it seemed that the rumor mill would be a little calmer for the next week...

Full report


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jdelano's picture

question now is--will market pump at 3:58 be powerful enough to close above 1220?  If so, I'm fucked.  If not, market is fucked as three fails is a charm rule says market drops 4% by wednesday.   

Belarus's picture

It's so sad that you just know the mysterious power hour will return as it always does that mystifies human action. 

jdelano's picture

right now, spiking levitation on hardly any uptick in volume.  I'd give away 25% of my total portfolio to someone with the knowledge and ambition to expose the people behind the horseshit in this market.  

broke433's picture

Don't short indexes during earnings. Buy aapl for a quick profit before earnings and wait a couple weeks when earnings are almost over to short again.

jdelano's picture

we'll see.  Lot of hedge funds lined up to defend the hell out of 1220-1230.  

broke433's picture

Yeah but I don't think you would get the kind of drop we have had the last couple months. The EU situation has successfully been kicked to at least next Friday. I think a good time to short would be a day after the summit when earnings are almost over and everyone will start to talk about how Europe has no chance of survival again.

jdelano's picture

u might be right.  ah well.  Hopefully for me the Tylers will expose some exploding credit bomb or G-PAp will come out over the weekend and say fuck it, on second thought, we're done with this crap.  Greece is out bitchez.   

LeonardoFibonacci's picture

Markets will rise another 15% because of this

jdelano's picture

Next time keep it to a reasonable 3-5%.  Hyperbole undermines your credibility.

L G Butz PhD's picture

Actually, making predictions undermines your credibility.

Belarus's picture

Something occured to me: the market turned on an absolute dime a week and a half ago and the market has skyrocketed virtually everyday since. Think about this: it turned on a dime for no reason at all. But, no, it didn't. It turned because the HFT ramp boys, the 1% powers that be, saw something happening from out of the woodworks.

What was it? It was Occupy Wall Street. Think about this, the 1% are the banks and the politicians. Isn't it ironic that EXACTLY when OWS was starting to gain some credibility as a viable revoluation that the stock market very suddently turned and skyrocketed skyward? No, there is no coinincidence.

This rise is a desperation fling.....had the market kept tanking the 1% knew that had the market kept droping like a rock OWS would already be 100% bigger than it is...the market rocket has been a total and utter depseration move to keep tbhe 401k'rs etc. on the sidelines of the OWS movement.....

I mean we've got the population getting out and protesting, almost no sane person  in the world is buying stocks today, and yet ramp after ramp after ramp after in-human ramp during power hour (it's coming again today folks) occurs. Why is that? Don't tell me it's a sticksave in Europe. It's not: Gold and Silver has SEVERELY underperformed equities during this miracle ramp which makes no sense, because the only way to save Europe is for the ECB to print money. If the market believed that's what the outcome was going to be, which then is the reason stocks have skyrocketed, then why the fuck are PM's getting their asses handed to them in comparision?

Nope. This entire move is based on a total manufactored attempt to keep some of the plebs happy.  


nope-1004's picture

Agreed, but don't just limit your analysis to when OWS started.  This ponzi has been stoked since Oct '87.  OWS is just a little more timely and one can connect the dots easier.

That's why I firmly don't believe that the market needs to sink for more QE.  The ponzi brokers and white collar criminalized fraud agents don't want this thing to fall, moreso next year when there is an election.  So the computerized ramp will continue.

Watching gold and silver makes me laugh.  Not only does the beat down occur EVERY 2am EST time, but it occurs as soon as legs start to appear under PM"s to rocket them higher.

See, no inflation.  Viola!!


kaa1016's picture

I'm with you 100% on this. We know these assholes will ramp this market higher in the last 30 minutes, especially if people with common sense try to sell the market at days end.


Nobody For President's picture


I've been watching that fucking ramp and talking (screaming sometimes) at my monitor - Belaraus may be right, but I tend to the thought that it is the short squeeze from hell/bear market rally before the fall, and the HTFs will, some great day soon, short the crap out of all this *stuff* and start ramping down the last witching hour.

I suspect it will be on a Monday, not a Friday.

I'm probably wrong about this.

But the betting pool is: Ramp up or Down today? Once upon an organic time, you could sort of predict, on a not-much-news day really, that Friday would be a ramp down - taking some profits for the week and not wanting to be long over an uncertain time this weekend.

 This Friday?

I think the you-know-whos are gonna ramp it up - one, hopefully, last squeeze before reality bites.

But I'm probably wrong about this, too. Actually, I hope to hell I'm wrong about this. I can afford to keep losing on the short side, but I really, really don't like it!


And - on a side note - does anybody besides me find it strange/surreal/words fail me that "Paid For By Obama For President" advertisements are on this site? I mean, I'm looking at one Right Now! WTF?

I'm an old fart, and I honest to God don't understand *anything* any more. If I ever get back even (and I will), think I'll put it all in cash, silver (more liquid in the boonies), and guns...I'm off the grid on a 43 acre, out in the boonies homestead, all built now. Can probably get by.



Nobody For President's picture

Well, Fuck Me. I was right - ramped up. The last 10 minutes were hilarious. (NOT)

So I won on the office pool, and lost on the Market.

Thank God It Is Friday!

I'm gonna go fly - fuck this shit.

Randall Cabot's picture

Low volume, relatively steady trading pattern strongly supports a shocking END-OF-DAY RAMP.

zorba THE GREEK's picture

The ultimate solution for Greece would be for banks to take a 200% haircut on Greek debt.

That would mean that whatever amount Greece owed a given bank, that bank would now owe

Greece. First it would punish the banks for making such obvious bad loans to Greece, and secondly

it would give Greece enough money to keep their excessive lifestyles going for another 10+ years.

Greece could use the money to buy shares in the banks to recapitalize them and in turn Greece could

use their bank shares as collateral to get low interest loans from the IMF and the ECB. 

It's a win/win situation. Ms Deo is not the only erudite expert on the Greek debt problem.

slaughterer's picture
Barroso sounds like he needs the money yesterday. EU's Barroso says any decision on EFSF or on banks at Oct 23rd summit should take effect immediately
bigdumbnugly's picture

is chart 5 a representation of the broken yo-yo this has all become?

Mr Lennon Hendrix's picture

Looks like a peace sign.


Ban the bomb...ban the bailouts.

machineh's picture

There's LEVERAGE for you -- via the non-participating participants.

But -- OOPS!! -- it's leverage in the wrong direction.

A total wipeout 100% default buys only a 50% haircut -- CRAP! 

Maybe Greece should just give up on its banks ... let a new banking industry arise from scratch.

Mr Lennon Hendrix's picture

And here I thought they might do what you propose one and a half years ago.

bigdumbnugly's picture

lol.  you in marketing LH?

maybe they can be convinced to use that as the new national greek logo.

harmony and understanding, sympathy and trust abounding.   

...well, maybe not so much trust abounding

Mr Lennon Hendrix's picture

harmony and understanding, sympathy and trust abounding.   


The deeper into the rabbit hole the system goes, the crazier the propaganda.....

I wonder what Obama's '12 campaign slogan will be?

Shut up and HOPE, damn it!

bigdumbnugly's picture

or how about...


eat your peas

'cause u gotta appease

p - pp - pthf - p - pp - pthf

bend over please

and just pay those fees

p - pp - pthf - p -pp - pthf


(best rap i can do in text, lol).

BORT's picture

Check out the news from Iceland.  Which volcano erupts first:  Katla or Debt

Fips_OnTheSpot's picture

better watch El Hierro - very grumpy below sealevel

Mr Lennon Hendrix's picture

The financiers and policy makers are praying they can have an excuse for a collapsed market, be it Mother Nature or war.

Hansel's picture

If 50% isn't enough and a "large restructuring" would be better for Greece, just go all the way for the 100% cut.  What is sovereign debt backed by?

Fips_OnTheSpot's picture

go back where "credit" comes from.. latin "credere" - which means 'trust'. There ya go.

jdelano's picture

was a typo.  it's really from currere.  "To run"

Fips_OnTheSpot's picture

Wah, another monitor cleanup session :)

slaughterer's picture

Could also be attributed to "credo" (blind belief).

Nobody For President's picture

Cracked me up! Thanks! I needed that.

dracos_ghost's picture

Since we have fractional banking authoring "credit", isn't it OK to have fractional trust. For that matter, can't Greece pay back in fractional remittance and resolve their debt with something like 4 Euros.

maxmad's picture

 What is sovereign debt backed by?


The blood of the elites!  The Elites can't take a "haircut"!!!

Long-John-Silver's picture

What is sovereign debt backed by?


Nothing, just like Gold. /sarc

GeneMarchbanks's picture

Friday afternoon release an accident? I think not. It matters not, the 'market' has no sense whatsoever of... well... anything.

qussl3's picture

Great analysis.

What an epic clusterfuck.

abugarance's picture

geithner has it all sorted thanks to a blankfein haircut double squared's all been taken care of


Segestan's picture

Time to Break out..' Bazooka Gold' .....say to 50,000?. Problems solved?

user2011's picture

Remember the 500 million + ambassy we are building in Afghan ?     I think it could be a mineral ore refining facilities.

Quinvarius's picture

I think it is important to remember that from a sovereign perspective, all this debt is just a charade to allow money printing with the illusion of that money actually has a purpose or a backing.  The money printing will not stop no matter what. 

And anyone who thinks the Euro is going to crash has no clue about FX markets.  FX is completely rigged by central bankers.  There is no economic push or pull on paper garbage money.  The exchange rates are set by interventions.  On a gold standard, economic events effect currency because gold changes hands to settle accounts.  On a fiat standard, exchange rates are set to adjust economic activity.  The price of paper is the tool, not the outcome.

Going Loco's picture

Quinvarius - "FX is completely rigged by central bankers."

Well it is until it isn't. Just ask Norman Lamont (British Chancellor at the time Soros killed the pound).

Quinvarius's picture

I have heard that Soros rumor, but after examining the timeline, it is clear that Soros was operating on inside knowledge of coming government actions, as he always does.  He didn't kill the pound.  He knew the British government was about to take an action that would devalue the pound.  Can I prove it?  No.  But in the end, it was an offical policy to devalue that caused the drop.

If you had never heard the rumor that Soros killed the pound with his vast network, and just looked at the event timeline, you would come to only one conclusion.  He paid for information and influence.

The above gives you a good feel for all political mumbo jumbo that was going on.  And notice, that final decision to make sure the Pound was pulled out of the ERM was done in a secret last minute meeting between a few insiders, just after it was publicly stated the pound would be strengthened by raising interest rates.  Soros would have been destroyed except for the last minute hi-jacking.  I have no doubt he paid well for that.

Voodoo-economist's picture

to be perfectly honest, this bank only has underperformers left. Id put their sell side research where it belongs: into the next toilet.