From Peter Tchir of TF Market Advisors
What Is A 50% NPV Reduction
In the original, July 21st proposal, the IIF assumed a 3.8% discount rate on the 30 year zero, and a 9% discount rate on the Greek flows. According to my little spreadsheet, that created an NPV of 78.9% - pretty much what they said. So that is how they calculated a 21% haircut.
So what would the absolute most egregious way to say they are taking a bigger discount? If they ran the NPV with a rate of 4.25% for the zero (French 30 year zeros were trading at 4.1% yield yesterday according to Bloomberg) and they ran the Greek flows at a "less normalized" 20%, then guess what, the same bonds as July 21 would have an NPV of 50%.
Okay, that is too egregious. If they took the July bonds and reduced the coupon to be received by 1% then they could achieve a 50% NPV using a Greek discount rate of 15%.
If they stick with a 9% discount rate on the Greek flows, it is harder to get to a 50% NPV without some actual debt forgiveness, though maturity extension would help there.
It will be interesting to see what bonds the IIF is proposing to get in exchange for existing debt, but there will certainly be an element of gaming the system with NPV calculations. All the comments so far, are extremely vague, on something that would be nice if it was a lot simpler. Maybe not so nice for the banks, but nicer for the markets longer term. I'm guessing the actual IIF proposal won't surprise the EU politicians (maybe), but it may surprise the general public if the terms don't look and feel like a real 50% haircut.
The other striking element is that I swear Germany tried to say no more ECB purchases once EFSF goes live, and Trichet is saying the opposite. If the EFSF has to do secondary market purchases rather than the ECB, that is a big deal. If EFSF can still do what it wants in addition to the EFSF, that is also a big deal.