The Greek "Ultimatum": Bailout (For The Bankers) And (Loss Of) Sovereignty

So after one year of beating around the bush, it is finally made clear that, as many were expecting all along, the ultimate goal of the Greek "bailouts" is nothing short of the state's (partial for now) annexation by Europe. According to an FT breaking news article, "European leaders are negotiating a deal that would lead to unprecedented outside intervention in the Greek economy, including international involvement in tax collection and privatisation of state assets, in exchange for new bail-out loans for Athens. People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures." Thus Greece is faced with the banker win-win choice, of not only abandoning sovereignty, a first in modern "democratic" history, in the pursuit of "Greek" policies that are beneficial for Europe, or not get a bailout, which would only serve to prevent senior bondholder impairments. How could Greek leaders and its population possibly not accept such an attractive option which either leaves the country as another Olli Rehn protectorate, or forces it to not bailout Europe's overleveraged banker class. In essence Europe is now convinced, just like Hank Paulson was on September 14, 2008, that the downstream effects from letting Greece implode are manageable. But the key development is that the Greek bankruptcy, which from the beginning, and as Peter Tchir's note below demonstrates, was always simply a Greek choice, was just made that much easier.

From the FT:

People involved in the talks said the package would also include incentives for private holders of Greek debt voluntarily to extend Athens’ repayment schedule, as well as another round of austerity measures.

Officials hope that as much as half of the €60bn-€70bn ($86bn-$100bn) in new financing needed by Athens until the end of 2013 could be accounted for without new loans. Under a plan advocated by some, much of that would be covered by the sale of state assets and the change in repayment terms for private debtholders.

Eurozone countries and the International Monetary Fund would then need to lend an additional €30bn-€35bn on top of the €110bn already promised as part of the bail-out programme agreed last year.

Officials warned, however, that almost every element of the new package faced significant opposition from at least one of the governments and institutions involved in the current negotiations and a deal could still unravel.

In the latest setback, the Greek government failed on Friday to win cross-party agreement on the new austerity measures, which European Union lenders have insisted is a prerequisite to another bail-out.

In addition, the European Central Bank remains opposed to any restructuring of Greek debt that could be considered a “credit event” – a change in terms that could technically be ruled a default.

One senior European official involved in the talks, however, said ECB objections could be overcome if the rescheduling was structured properly.

Despite the hurdles, pressure is building to have a deal done within three weeks because of an IMF threat to withhold its portion of June’s €12bn bail-out payment unless Athens can show it can meet all its financing requirements for the next 12 months.

And the latest set of very timely observations from TF Market's Peter Tchir.

You Can Lead A Trojan Horse To Water But You Can't Make Him Drink

Restructuring in one form or another seems imminent rather than years away

Well, it seems as though this week's news flow has spurred the mainstream media into action.  Everywhere you look there are stories about the Greek credit crisis.  It is encouraging to see that more of them now agree with my view that a restructuring would occur sooner rather than later.  Only a month ago, almost every article and every piece of official street research made it clear that a restructuring was at least a year off, if not longer. I demonstrated why I thought that opinion was wrong, and although I haven't been proven correct yet, I am no longer in a tiny minority.  Restructuring (reprofiling or default or whatever you want to call it) will not be easy, but I remain convinced that it is the best outcome for Greece and in the long run will be the best outcome for Europe even with the short term pain it will cause. 

There is growing scrutiny of the ECB's actions and motivations

It has also become painfully obvious to everyone that the actions of the ECB are making any resolution more difficult.   Someone, other than me, has now called the ECB 'pathological' in their resistance to restructuring.  The ECB, led by Trichet, made a major mistake in their purchase of Greek bonds in the secondary market.  It is unclear what they intended to gain (other than a short squeeze) as Greece was not tapping the capital markets for new bond deals.  If Trichet worked at a real bank, he would have been fired by now, or allowed 'to pursue time with his family'.  Someone who was not part of the bad decision would be brought in to oversee the positions.  The ECB needs to change personnel immediately and bring in someone fresh to be part of the negotiations who can focus on what is best going forward and not on how best to cover up previous mistakes.

It is Greece's decision to default or not, NOT the ECB's or EU's

I continue to be confused by the fact that most people talk about the issue from the lender's perspective.  "Should Greece be allowed to default?" "Does it teach Greece a bad lesson if they let them walk away? "  "Won't Greece just default again if the ECB lets them walk away?"

The reality is the IMF, or ECB, or EU can offer money to Greece, but it is Greece's decision to borrow more to pay off old debts.  Only Greece can decide to make payments and not default or demand restructuring.  Other entities or countries can make it easier for Greece to kick the can down the road, but in the end, only Greece can decide whether or not to pay its bills. 

The people of Greece seem to prefer default.  It is fairly clear that this is not a short term liquidity problem, but a longer term solvency problem for Greece.  Greece has some assets it can sell, but as I have said time and again, they will still have those assets to secure new funds after a default/restructuring.  I continue to believe it is in the best interest of Greece to default and it is their decision, no one else's.  It may be bad for the rest of Europe if Greece defaults, but that really should not be the priority of the Greek government.

If Greece defaults, the creditors can then take steps to enforce their rights.  If a person fails to pay on their mortgage, the banks can enact their rights to foreclose.  If a U.S. company fails to pay its debt, creditors will suit, and the company and debtors will typically resolve the issue in the courts under Chapter 11 or Chapter 7.  There are similar statutes for corporate defaults in other countries.  The real reason that we are hearing so much about this from the lenders perspective, rather than the borrowers, is because it is not very clear what the lenders' rights are if Greece stops paying.

If Greece stops paying, the lenders cannot 'foreclose' on it.  There is no law that dictates how to proceed like chapter 11 does.  The bonds have very few if any covenants.  The lawsuits would have to be won in Greek courts and then enforced by people employed by the Greek government.  Good luck with that.

The reason the lenders have an almost irrational need to avoid a default, is they don't know what they will get if Greece does default.  There is no good way to analyze it.  Their ultimate recovery will be based on some threats of future lending, rights of set-off, and maybe some threats of trade sanctions, but unlike a mortgage or a corporate bond, there is no good way to analyze the potential outcome.  There is a reason 'vulture' funds focus on corporate debt much more than sovereign - there is a way to analyze the outcomes, it is not just guess work.

So people can continue to comment on whether Greece should be allowed to default, but that misses the point.  Lenders can make it easy for Greece to make payments, but choosing to default or not remains solely a Greek decision and they should do what is best for them.