Europe is abuzz this morning following a Die Zeit article indicating that Germany was planning for a Greek debt restructuring, one that would allow Greek to retire debt earlier than expected. From Market Watch: "The German and Greek finance ministries on Wednesday denied a report in the German weekly newspaper Die Zeit that the German government was weighing a plan that would allow Greece to retire some debt early, using subsidies from the European Financial Stability Facility, Dow Jones Newswires reported. Spreads on Greek credit default swaps, or CDS, initially widened but then narrowed after the Die Zeit report was denied." And while everyone is of course immediately denying that the EFSF is nothing but one big ponzi vehicle, which it would turn out to be should this report be proven true, Goldman's Dirk Schumacher has released two notes which confirm that this is indeed precisely the plan. And just as Goldman dictates US fiscal and monetary policy, so its European strategists are critical in determining European pyramid, kick the can down the line plans.
Specifically, Schumacher's first note:
Newswires cite an article from Zeit newspaper that reports about plans of the German government to change the “mechanics” of the EFSF such that the facility lends money – at low interest rates - to countries which can be then used to buy back debt. Such a debt buy back at market prices would imply a reduction in the overall debt level of the respective country.
The proposal itself is nothing new, though the Zeit story suggests that the German government now thinks that such a debt buy back could be indeed part of a reform of the EFSF. What it also shows, is that Euro-zone governments are obviously thinking along many lines and are discussing all different models how to change the set up of the EFSF.
As a reminder the EFSF is nothing but one big structured product (CDO), allowing it to receive a AAA rated rating from the rating agencies, and as such any possibility of complete AIG-like devastation is most certainly excluded.
Here is part two of Dirk's observations:
As I mentioned in my Sunday note (this past Sunday), this – ie the possibility for the EFSF to start buying debt in the secondary market – is indeed on the agenda. There are lots of remaining outstanding issues to be sorted, but I would be surprised if its not included when the full package is revealed, probably in March.
If implemented, this will ease the need for ECB purchases, but there is no reason to think that it’ll reduce the net demand from official sources for sovereign debt. Ought to lead to some spread compression.
And what will the ECB/EFSF do with the sovereign debt on their books? My suggestion (which I am pushing around) is that they’ll one day sell it back to the sovereign debtor at cost (against conditionality), thereby providing Greece etc with some (if not all) the debt reduction they’ll need.
Stay tuned – the fixing of the Euro-zone problems is still in the early stage of being worked out, and trial balloons will continue to be sent up in coming weeks, and the impact could be huge.
Of course, the spreads jumped when the news was announced, and compressed only after the refusal, meaning that the charade game in Europe is alive and well. Additionally, we can't wait until the same structured credit product that led to Europe's insolvency is the very same that is now supposed to "fix the Euro-zone problems."