With constantly changing variables in what will be the fourth and not final Greek bailout, it has been relatively difficult to pinpoint just what the "fulcrum security" is in the ongoing restructuring that is not really a cramdown bankruptcy but kinda, sorta is, and more importantly where the money will come from. A big issue that Europe has discovered with a two and a half year delay (pointed out here first, but anyone with capacity for rational thought could have grasped it at the time), is that Greece has hit the inflection point where without more, and substantial, debt forgiveness it is unviable entity, and will certainly not hike the Troika's hard line target of 120% debt/GDP by 2020. In other words, Greece can no longer layer more debt to pay down debt.
The problem is that both Germany and the ECB have decreed they will not agree to Official Sector impairments (recall the private sector was already crammed down with original Greek debt collapsing into New GGBs at about 20 cents on the dollar, which in turn then proceed to trade immediately down to 20 cents of Fresh Start par, implying there is absolutely no value in this most subordinate debt), and as Germany made clear last night, it refuses to permit a largely meaningless cut in interest rates of Greek bilateral loans from 150 bps to a token 25 bps, an adjustment it classified as "illegal."
So what is the latest state of play that has the biggest support from all parties?
It appears that the plan which is now back in play, is one which Greece had previously nixed, namely a partial Greek bond buyback of the private bonds at a discount to par: with numbers currently rumored anywhere between 25 cents and 50 cents on the euro.
On the surface this appears a reasonable deal, however there is a reason why Greece killed this proposal one month ago. As Kathimerini reported back then:
The Finance Ministry is ditching banks’ plan for a bond swap that would have eased their recapitalization requirements.
According to sources, Minister Yannis Stournaras has rejected the proposal that local banks presented to him, suggesting that this would be a move that would benefit bank shareholders disproportionately. Ministry sources added that such a move would generate accusations about favorable treatment of banks in comparison with other holders of Greek bonds.
That is also the view by the troika – i.e. the representatives of Greece’s creditors – who had earlier rejected a similar plan.
This is correct: because the only beneficiaries would be those financial players who either bought the bonds in the open market, or held on to the original "pre-petition" bonds.
But even if Greece agrees with this proposal, there is a question of where Greece will get the money for this distressed debt buyback? After all Greece is completely broke, and any new cash would have to be in the form of loans, as not even the most nebulous interpretation of the Maastricht treaty would allow an equity investment, or to use the proper nomenclature, "a fiscal investment" into Greece.
Moments ago, the FT gave us the answer:
An alternative proposal involves offering €10bn of extra loans to Athens from the European Financial Stability Fund, the eurozone’s temporary bailout pot. The option is seen as a leading contender for a compromise deal.
This extra lending would support a more ambitious scheme to purchase Greek bonds held by private investors, part of a package of debt relief measures to bring down Athen’s debt to significantly below 120 per cent of economic output by 2022.
Sanctioning a new €10bn of bailout loans would pose a considerable political challenge to several countries and require the backing of restless parliaments in Germany, Finland and the Netherlands.
In other words, the money is now supposed to come from the EFSF, funded realistically by Europe's AAA governments, all of which have said not one more penny will go to Greece. However, the EFSF already has prefunded and committed capital so it is a convenient loophole.
The problem will arise when the parliaments of said AAA countries are asked to explain to their people why they all have to pay billions in order to repay between €20 and €40 billion (assuming a 50 or 25 cent repurchase price) of Greek debt, just so Greece has a theoretical chance of hitting 120% debt/GDP by 2020, a number which has virtually no chance of being hit when one accounts for the the denominator: the collapsing Greek GDP which last quarter tumbled at a 7% rate.
But the kicker is when one traces the use of funds. Because what is will happening is a payment not to Greece, obviously, but to its creditors: entities which for the most part are hedge funds, and which have bought up GGB2s in the mid teen levels as recently as 4 months ago (recall Dan Loeb's major position in Greek bonds).
So to simplify the flow of funds:
- Source of Funds: EFSF, using European cash primarily originating at places such as Germany, Finland and Netherlands
- Use of Funds: Hedge funds holders, with a cost basis in the 10-20 cent range.
- Summary: European governments, already struggling with day to day cash procurement and finding new and inventive ways of keeping the ponzi going day to day, will pay... Hedge Funds and their billionaire PMs.
And what do they get in return:
In part to address the inevitable political concerns, officials are drawing up options to back the new loans with collateral from Greece’s privatisation programme, which aims to raise €50bn.
So do not fret dear AAA-rated (if not for long) European countries: the money you will spend to generate between 100% and 400% returns for creditor hedge fund in a few brief months, will not be lost - in exchange you will have "collateral" from the Greek privatization program. Which may or may not work: perhaps if Dan Loeb, Elliott and the other creditors who are about to make a huge profit by flipping Greek bonds will "privatize" Greek real estate, and the funds will go back to the European countries who made the payment to the hedge funds a possibility in the first place.
The only real loser here? The Greek people, who will have just sold off up to €50 billion in national assets (and this is uncertain - there may very well not be any buyers for Greek "assets"). The same Greek people who will get not one penny from any of the convoluted fund flows explained above.
And now you know what the current state of the latest Greek bailout process is.