What Is A 50% NPV Reduction

Tyler Durden's picture

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. 

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
qussl3's picture

Just buy already, the MM's have stock to sell you.

Ancona's picture

Quick!! Someone call Goldman! We need to invent some criminally insane way to hide all this shit!

pendragon's picture

with so little clarity how can there be so much bullishness. it's bs

NotApplicable's picture

In today's world, the only way there can be bullishness is due to lack of clarity. Otherwise, the "writing on the wall" would be obvious to all. And of course, "the money has to go somewhere looking for return," lest the OPM managers lose their jobs for doing nothing. So, like some around here at ZH, they place their bets anyway and keep their eyes on the exit at all times.

Obfuscation, FTW!

jaffa's picture

In contrast to regulated professions such as engineering, law or medicine, there is not a legally required educational requirement or license for economists. In some job settings, the possession of a Bachelor's or Master's degree in economics is considered the minimum credential for being an economist. Thanks.
reverse cell phone lookup

jaffa's picture

Methodological reductionism is the position that the best scientific strategy is to attempt to reduce explanations to the smallest possible entities. Methodological reductionism would thus hold that the atomic explanation of a substance’s boiling point is preferable to the chemical explanation, and that an explanation based on even smaller particles would be even better. Thanks.
painters Dallas Texas

mudduck's picture

Clarity for ya; Greek bonds = crackhead IOU. EU plans to save economy = doctor erasing dark spot from X-ray to cure tumor.

GeneMarchbanks's picture

Appreciate the insight from someone who clearly isn't wearing a DOW 12000 hat.

A Man without Qualities's picture

The various announcements are a bit misleading - fact is, NOTHING has been agreed on anything.  Impressive short squeeze, though....

glepo's picture

Draghi worked at GS like all the US decision makers

Quadlet's picture

Pop Quiz:

GDP Growth = GDP Deflator...

Real GDP Growth = ?

kahunabear's picture

Yep, inflate away the debt! Oh wait, what is the debt growth rate?

Ponzi time!

CrashisOptimistic's picture

 GDP growth is quoted inflation adjusted.  Real GDP is what is reported.

Argue about inflation and true inflation blah blah.  That's not the point.

GDP is already adjusted when reported.

AnarchoCapitalist's picture

How is this not a credit event?!

SwingForce's picture

The 15 ISDA members, including Barclays, don't get a haircut. They are the ones who determine the credit events. I refer you to an earlier ZH post: http://www.zerohedge.com/news/fyi-isda-ggb-cds-cya

adyaner's picture

It ain´t over till is over baby, the new euroland anthem song...

Chrikus van der Rockhuizen's picture

we should nationalise the mines. that will save us

vote_libertarian_party's picture

The Italian 10yr yield is down a smidge.  French up a smidge.


So the biggest fix ever isn't moving the yields beyond normal daily fluctuations?


Yepper, sure am glad I have TBT calls lottery tickets.

bsdetector's picture

If in fact there is no real haircut that would support the ISDA position that there is no default. If I was holding a CDS I'd be pissed.

SwingForce's picture

If I were a Greek worker I'd be pissed! My retirement account's bond get whacked, and in addition I am expected to work harder to pay THE FULL PRICE TO BANKSTERZ? Give me an hour to think about it.....

bsdetector's picture

Right, I forgot about the Greeks. Everyone should be pissed except the banks and the CDS payors.

gatorengineer's picture

Germany aaid no more ECB participation in the SECONDARY Market (this is the support bill that the bundestaag passed).  Nothing is stopping the ECB from buying on the primary market.........

pauhana's picture

Italy sold Euro 750 million of inflation protected bonds this morning but the spreads blew out from the previous auction.  Wonder what the CDS on that is worth . . . .


CrashisOptimistic's picture

This is an important realization that will unfold.

The CDS product has no value.

But far more important, this eliminates a way to hedge bond risk.  You have to back off any inclination to take risks in these shaky bonds because you can't use swaps for hedges.  They won't pay.  It's a waste of money buying the swap.

These interest rates are going to climb.  These shaky European country bonds are less desired now (given the precedent of 50% loss) so the price of them has to fall.  That will drive rates up.

This is not an "eventually" thing.  This will not "buy time".  These bond yields are going to climb very soon from the loss of swap hedge.  All those countries will not be able to borrow.

Whoa Dammit's picture

Extend maturity to equal the half life of plutonium. Problem solved. <Sarc>.

JR's picture

Nathan Martin, in his perspective today on “Europe Has a Deal,” says the deal is “long on words, short on details…because where you are printing money from nothing, you don’t want to tell the world exactly how you’re going to do it, but it doesn’t matter because printing money from nothing is still printing from nothing, all of which goes to benefit those who produce it…”

Here’s Nate:

On the leveraging side the two other aspects of the deal more than compensate for deleveraging associated with the haircut. Part one involves leveraging their “European Financial Stability Facility (EFSF) by “four or five times!”  Let me translate that for you – the EFSF has very little, if anything, real backing it. It is simply a made up devise of pretend money that they are now leveraging – leveraging the leverage if you will, which is a fancy way of saying that they are printing money from nothing.

Part two of their leverage game is that they conducted phoney bank “stress tests,” which they all passed of course, even though they are all functionally insolvent. Still, they are raising the capital requirement to 9%. Now, most people would put the raising of the capital requirement into the deleveraging category, but I ask those people one question to point them in the right direction, “Where does that capital come from?” Uh huh, once again we’re talking about thin air here, and when we’re talking money from thin air we’re talking leverage even if said leverage is parked momentarily…

Remember when our banks were required to “raise their capital requirements”? Immediately Hank Paulson pushed for, and got, the ability to pay the banks for “excess reserves.” Those “excess reserves” are now parked to the tune of $1.6 Trillion, all earning interest paid for by the people of the United States.  The Europeans are simply taking from the playbook of the U.S.. All you need to do, then, is look at the result here – the stock market zoomed for a few months and then petered out, while simultaneously creating inflation for the things people need to live. There you go, expect more un/reported inflation, and expect to revisit the Euro problem again and again until the people finally remove those who control the production of money.

It’s a dangerous game because inflation will eventually leave the majority of the population penniless…


haibop's picture

great information. thanks! Matt Huston Ex2

GreenPlease's picture

EFSF isn't designed to purchase securities directly. In its present form it's designed to leverage private capital as far as I know. The thinking is that financial institutions and individuals will buy euro-area public sector debt to the tune of about 1trillion which has a "first loss" EFSF gurantee of 250billion or 25% (or 20% or whatever number they pick).

Let's throw individuals out and just consider (broke) european financial institutions (because no one outside of europe is going to buy in appreciable quantities): euro area governments inject the banks with capital which these (overleveraged) banks then use to buy EGBs. Meanwhile, the banks are asked to effectively de-lever. The result is that the private sector gets slammed twice: first by being taxed to fund the EFSF and the bank capital raises and then again when banks don't extend them credit or renew their loans.

IMO, the whole thing is DOA. Even if the EFSF had the "firepower" that it claims it wouldn't last very long (perhaps through the middle of 2013). 

I wonder how euro area home prices are doing.... isn't that part of ze price stabiliteeee?

steve from virginia's picture

Peter Tchir takes the time and trouble to make some bookkeeping calculations and discovers the so-called numbers work ... but only in a world where cats have smiles and pills make you smaller.

Better run, here comes that Red Queen!

In the real world, it is hard to hit the interest rate targets because they change violently. Any assumptions made in one second can be considered invalid the next. The EU leadership's crisis management is to get from one summit meeting to the next. They are at the end of the gangplank and the sharks are circling. The costs across the board are rising inexorably. No matter what the Eurocrats try their aims are either out of reach or too expensive. Europe is broke, any assumption made by leadership (or Peter Tchir) that assumes otherwise is invalid.

Assumption #1 is that a 50% haircut on Greek debt will make the rest manageable by the Greeks. What Greek debt and indebtedness to whom? The Greek debts to Greek banks isn't in the equation and Greek public debt also isn't in the equation. Why look at transient rates at all? Greece is not an industrial economy like Poland or Slovakia, it does not earn anything, it is a Euro tax haven. It can only earn when its citizens aren't burning the place down or on strike. What it earns is negligible during the best of times and its costs are extreme. Restructuring Greece to fit an industrial model is idiotic but this is what the EU leadership presumes.

All the stupid stock bulls in the US presume the same thing.

Under realistic circumstances, Greek PUBLIC debt can command a 50% haircut (if it can float a 10yr @ non-usury rates) and its PRIVATE debt is due a 90% haircut IF THE LENDERS ARE LUCKY.

What is a used Mercedes or a used plastic 'hotel' development worth? Not much ... time to get real, people!

glepo's picture

But guess who owns Greek private debt? German (11bn)/French (40bn)/UK (10bn) banks!!!!!!!!

And France is AAA plus check Albert Edwards chart on off balance sheet liabilities.

And then Poruguese private debt, and then Spanish banks and then Irish .......

JR's picture

Greek debt crisis a Goldman Sachs economic coup?

  • Posted on 07.28.11
  • By Stephen C. Webster

Journalist, entrepreneur and Russia Today opinion host Max Keiser traveled to Greece recently for a film project that looks at how the country came to be on the verge of default.


The conclusion of his interview subjects, and indeed a large portion of the Greek population, is that Goldman Sachs, perhaps the most powerful financial firm in the world, has engaged in an economic coup against the nation, taking advantage of rife tax fraud to force Greek lawmakers to hand over the country’s public assets.


His mini-documentary is concise, smart and informative. Take 20 minutes to learn what happened there, before it starts happening in the U.S.


StychoKiller's picture

Reality has fallen out of fashion, what with the Wars, famines and death and all...