Let's back up for a second and go through the events of the past week: the market's record flash crash, which certainly accentuated by HFT algos gone haywire, was to a big part caused by the live broadcasting of the real-time storming of the Greek parliament on Thursday night in Athens. The reason for the storming was the Greek population's general displeasure with imminent austerity measures to be imposed by the IMF which has now become the de facto saviour not just of Greece but all of the PIIGS and soon of the European core. The IMF in turn had to come in, after the EU realized that using the empty "Paulson bazooka", as we wrote extensively, did not work back then, and would not work now (CDS trader scapegoating campaigns aside), and also realized it is too fragmented politically to rescue Greece on its own, in essence confirming that the European Monetary Union is a sham and the euro is on its deathbed. And what it all really boils down to is liquidity: Greece was fully aware of the sad state of its financial affairs long ago, and unlike every debt-laden High Yield company in the US which is furiously refinancing debt or issuing equity to fix (if temporarily) its balance sheet, Greece did not take advantage of a generous market to shore up its liquidity. Well, one can say nobody was shoving term sheets before George Papandreou in January and February of early 2010, giving the country cheap and plentiful financing, which if executed could have resulted in not just the IMF not getting involved, and austerity measures not being instituted, but a far-smoother sovereign transition process, which at the very least could have bought the country another 6 months of time, during which the world economy may have well given the impression it had healed sufficiently courtesy of the slow and gradual market melt up (see HFT).
All that changes today - Greek blog DosePasa has released several smoking gun documents in which Boston-based Hayman Private Equity (no relation to the Kyle Bass firm, at least none that we can find), discloses it intention to offer a E20 billion loan through a non-binding Memorandum of Understanding to Greece at roughly LIBOR+125bps in February 2010. If the documents are proven legitimate, and with a plethora of executive-level signatures it appears they would be difficult to forge, Athens will likely now demand G-Pap's head on a platter, or at least a coherent explanation why he refused to do this transaction at massively beneficial to Greece terms, which most importantly, did not involve the IMF's austerity measures, which have been the source of so much consternation to date, not to mention a proximal cause for the biggest market drop in history.
Below are the scanned documents in question:
The sequence of events appears rather straightforward: in early January Hayman approaches G-Pap directly with a E7 billion L+125 loan offer. A month later the amount offered is raised to 20 billion, and while the interest on the loan is unknown it is hardly much higher.
What is most amusing is that the entity negotiating on behalf of Greece is the infamous Hellenic Post Bank, which as we noted previously, was uncovered to have been the party buying substantial CDS on Greece itself. What is even more amusing is point 6 of the MOU: "A necessary precondition is also that the Second Party [Hayman] will not hedge the credit risk of the Hellenic Republic in the CDS market." Now this is pure comedy: Greece may have sunk itself because of its idiotic insistence that any official counterparties on new issuance transactions are prohibited from hedging their exposure. We are convinced that this is what likely sank the deal, although we do not know for a fact what happened with the negotiations post February 8. We are certain that Hayman considered the inability to hedge their generous offer and told Greece to shove it. The sad result - three months later, Greek 2 Years spreads are 20%+. We have noted repeatedly that CDS hedges are absolutely critical to new issuance activity. Greece did not realize this - and now it is bankrupt.
It is likely that at at or around this time, is when Greece was also being courted by Russia and China about potential rescue loans, as was also previously reported. Those talks also led nowhere.
In summary Greece said no to both a US-fund based rescue effort, as well as sovereign rescue overtures by key non-American foreign powers. In the end the market called the country's bluff and Greece has now folded, stuck with any and all austerity terms that the IMF will impose upon it. The bottom line as far as G-Pap is concerned, is that there is now a smoking gun document (pending authentication - we have called the Hayman Group at (617) 217-2084 for an official comment, but have only gotten voicemail which is not surprising since it is Sunday), which indicates that Greece, as far as the public is concerned, could have avoided or at least delayed the imposition of austerity. And this will likely be the straw that breaks the back of G-Pap's political career, and could possibly lead to even more violent riots (surely no longer televized by CNBC, as the stock price of GE tends to correlate inversely with the number of people watching CNBC and panicking) in Athens in the upcoming days.
The return of massive daily volatility in the US equity markets is now here.