What Is Going On With The PSI For Greece?

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors

I remain confused why the Private Sector Initiative isn't finished yet? 

For option 1, banks can swap their bonds for a new asset that is principal protected by the EFSF.  Greece will provide payments that act to provide current income.

Greek 5 year bonds are trading at 40 today.  So are the bonds that mature in June 2020.  These bonds are part of the proposal.  So in theory, you could buy bonds at 40 to exchange them for the new plan.

Well, the French 2041 zero trades at 35.  The German 2042 zero trades at 45.5.  Where should an EFSF zero price?  I figure that using French rates as a benchmark is a pretty decent proxy.  Germany and France guarantee a total of 370 billion Euro, out of a proposed total exposure of 440 billion, so that's why using French rates as a proxy for EFSF rates seems fair to me.

In that case, the first thing you get by exchanging bonds is an asset worth 35 points.  Since the market value of the assets being exchanged is only 40, you only need the "Greek" portion of the exchange to break even.  Using a discount rate of 20% on the Greek flows, that portion should have a value of about 20 points.  So the entire package is worth 55 points, higher than where the bonds trade.

The fact that the NPV is nowhere near the 79% originally predicted is probably an issue.  As Greece has deteriorated the value of those flows has diminished. But still, if you think a Greek default is likely, with a 40% recovery, you should do the exchange, as the zero coupon floors your recovery at 35% plus whatever recovery you get on the Greek payments.  In event of default, you would have been better off doing the exchange.

Then why aren't banks doing the exchange?  Are they worried their accountants or the markets would see through the ploy of a "par" bond exchange and not give them any benefit from that trick?  Are the governments finally getting concerned that the EFSF should not pay banks par for 40% of their Greek holdings?  The IIF proposal must have been structured by Robin Hood's evil twin - the one that steals from the poor and gives to the rich.  The swap, that switches Greek exposure from banks to the EFSF ensures the banks lose less, but the people of Europe lose more directly.

Are banks reluctant to agree because they think that the IMF and ECB and EFSF and EU (the "quoitra"?) will continue to provide money to Greece allowing them to be paid par on their bonds as they mature?  Is it a game of chicken where banks cannot afford the losses, so rather than taking them, they just keep hoping that the powers that be are too scared to ever stop bailing out Greece?

Maybe they are scared that this new SPV will be able to negotiate with Greece and reduce their future payments?  Maybe they see this whole thing as a ploy to make it easier for the governments to take control of any rights the creditors have?  The SPV would consolidate all the voting, making it easier for the governments to take control of negotiations, so maybe this initial deal sounds good, but the banks know it is just the first step in an effort to wipe out their Greek debt.

Option 2 seems to be just a future commitment to do Option 1.  It may give them more flexibility than agreeing up front.  I am not sure how this is accounted for and if Greece were to default, I'm not sure how they would roll into the nice EFSF zero once Greece had defaulted.

Option 3 forces a write-down now.  I don't think many banks will choose that. High on the list of bank priorities seems to be the desire to avoid taking losses that everyone realizes they are sitting on.

Option 4 remains confusing, and not in the way that makes it look like banks are getting a sneakily good deal, just confusing. 

From everything I can tell about the proposal, very little will have changed from the perspective of Greece.  They will have shifted their debt to a slightly longer maturity profile, but the coupons are in line with their existing coupons and it seems to just shift the balance of payments - some to the EFSF and some to this vehicle the banks will own.  Maybe the ability to negotiate with the SPV for future reductions is their real goal, and they don't care that the EFSF is giving the banks a great deal.

We will likely rally on some announcement of the PSI being successful but I would really like to know why it has taken so long?  I would also love a clear explanation of how much it really does for the distribution of Greek payments. Let's not forget, Greece never expected to simply pay off all these short dated bonds as they matured.  They were going to issue new debt to rollover existing debt.  This deals with that rollover process on a bigger basis, so that is helpful, but how much are the cash-flows really shifted?  The annual payments from Greece will still be large enough that they alone could cause default.  

Nothing has been solved in Greece.  Until Greece is fixed or defaults, the markets will remain manic/depressive.  This proposal would shift some risk out of the banking system, which is good.  But it puts it directly on the EFSF guarantors.  One way to stop contagion is to put people in quarantine.  Here, we are doing the opposite.  In the effort to survive a few more months, the powers that be are helping ensure contagion.  They are turning some very shaky banks into merely shaky banks, and the governments are taking on obligations that will reduce their flexibility going forward.  That will make the contagion real, and harder to contain, as more are infected. 

In the meantime, we can wait for the single most powerful man in the world to speak.  And after Charlie Sheen's press conference, we can wait for Bernanke.

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Life of Illusion's picture


But it puts it directly on the EFSF guarantors.


And what are they collateralized with, privatizing public assets. “REAL ASSETS” not paper.

SheepDog-One's picture

You know what their real problem is? There are no 'real assets', only things claimed by us microbes spinning around the universe on a rock. 

The Australian Aboriginals have no word for 'property', they say it is not a word because no one can own the land it was here long before you and will be here long after youre gone.

All an illusion, the world bankers and politicians are prison guards and theyve gone insane.

fredquimby's picture

"The Australian Aboriginals have no word for 'property', they say it is not a word because no one can own the land it was here long before you and will be here long after youre gone."

What a refreshing thought.

Thanks SD1!

tmosley's picture

Yes, and that outs them as communists.  Look at how they lived before natural rights recognizing Europeans came.  They stole from each other, and demanded that some live for others.  They murdered each other over food, and kidnapped women and children as slaves.  How could anyone ever build anything permanent under such conditions?

No progress can ever be made without recognition of natural rights by the preponderance of people.  Property is REAL.  Just because men are not immortal does not mean that they can't have exclusive use to a given patch of land, and the things they produce on that land.

SheepDog-One's picture

'The Aboriginals were communists'...lol what??

What are you talking about? The 'natural rights recognizing Europeans' made the Australian Aboriginies lives BETTER? You dont know what youre talking about, read some history the British came and slaughtered them, and Aboriginies had very little trouble amongst themselves AT ALL before then. 

CPL's picture

There's no uhaul behind the hearse and that land was never yours to begin with.  When you bought the land you are actually in a lease arrangement with your government.  To maintain that lease arrangement you must and will pay your taxes, follow all civic statues regardless of their merit and register your birth and death with your owner.


The government.  Which is less about "the people" than it is about a wealthy cross section of society that knows about marketing brands like coke, pepsi, left, right, whatever.  Those are the people that own you.  You are about as unique and free as a cow on a farm.  You are free as you want to roam around the field, until the owner comes to milk you.


I don't see those conditions in a tribal situation.  So regardless if you want to admit it or not.  You are part of a herd of slaves run by semi-communist masters that adhere themselves to the communist concept of a central authority.


To put bluntly, you can't take a shit and wipe your ass in this soceity without a 1000 people involved in the regulation of the water in the tank, the quality of the paper you brush your ass with or the specific manufacturing details of the procelain throne you sit on.  Don't believe me?  Try not paying your slave tax this coming year, or having a baby outside of the system or attempting to drink a coffee while driving (it's illegal now in Ontario, Canada).  The aboriginals at least understand the illusion of "freedom" in a federal system offer is just that, an illusion.

oogs66's picture

maybe the efsf isn't ready?  maybe the old one can't do this?

IQ 145's picture

LOL ! Robin Hood's evil twin brother; steals from the poor gives to the rich ! Too true to be funny.

Peter K's picture

Hey, the French found a new way to make money. (Ala Nick Leeson). Why is anyone questioning them?

Oh, and by the way, is any real cash going to pass from Germany to the Greeks/SMP/ECB/EFSF anytime soon? We are just doing time in a literary structuralist lock up? :)

mac768's picture

why the heck should the German taxpayer bail out the reckless French banks????

BrocilyBeef's picture

I've been expecting Operation Milkshot. The weak countries get all the junk fiat, and the strong countries get all of Greek's yogurt.

SheepDog-One's picture

Printing out of spite to bankrupt everyone for the benefit of a few insane billionaires....all I know is these people must be stopped or we're all fucked in very short order.

kurzdump's picture

Most of us are already debt-slaves, seems to be time for these few billionaires to crack their whips!

IQ 145's picture

Did you want extra fries with that short order?

SheepDog-One's picture

Talking about bankrupt countries bonds which mature in 2045....wtf we've gone fully insane? 

Translational Lift's picture

The aim world-wide is to transfer the liabilities from the banks & bond holders to the people/sheeple!!!

SheepDog-One's picture


Its funny, the only people to get it right and early-on was the tiny sleepy country of Iceland, land of 'Bjork' and trippy weird music...there they threw pies in the bankers and politicians faces and said 'Absolutely not'.

Whats wrong with the rest of us? The Elvins of Iceland stopped it dead in its tracks while the rest of us marvel daily at our captors? This is so fucked.

nantucket's picture

re: iceland

their growth has rebounded sharply since then...there was a deep decline, but growth resumed from a properly re-set base....soemthing the large western countries can't seem to do  

BrocilyBeef's picture

What is Mr. Bernanke doing right now?

Everybodys All American's picture

These "real assets" are worthless. You want em?

BrocilyBeef's picture

ahh, that's how the U.S. dollars get so soft!

DalaiLamaInAShark's picture

I'm with Roubini, just get it over with.  The end is comming for Greece, why prolong the pain?  Right now, I wouldn't touch Greece with YOUR balance sheet!

RSloane's picture

The prolonging of pain gives TPTB further opportunity to profit from destruction of a people and their government.

nantucket's picture

it's a bitch of a conundrum for politicians...taking the correct action needed to resolve the situation (as they haven't done since 2007) is almost certain to get you kicked out of office almost immediately.  doing nothing, or all the wrong things, (as they currently are) gets you kicked out of office years and years later.  So the choice is kicked out now or kicked out years later.

it's a bitch to have to win office trying to prove the unproveable....your opponent would say your policies caused the recession...and you would have no way to effectively defend youself by "proving" that the recession would have been 100x worse if no, or poor, policy moves were made.  effed either way.

quite the conundrum.

slewie the pi-rat's picture

option 5: the banks have "covered" w/ a bit of default insurance or shorts here and there?

oh, yes, very confusing, but still just basically: liquidate or finance the can-kicking for the bankrupts, isn't it?

if people want to to try to "make money" by exposing themselves (even negatively) to banks, brokerages, insurance companies, and sovereigns and their "promises" wtf do i care?

just punch up yer online casino and tell all da boyz what yer play is and then post it here to show the world how fuking intelligent you are!

i still say: get long gold and silver coins, cash, and supplies

carry on, BiCheZ!!!

che's picture

The greek part of psi is a strip. Use 100% discount rate for years 2-3 and value of greek part is 2-3 points. Value of package is 37. Plus itsettles in 2012 and god knows were frtrs are them.