None of the terms seems have changed massively in the past week, but time is running out with March 20 set as the final deadline as this is when Greece would otherwise have to make a payment of 4.5 billion euros ($18.7 billion) on maturing debt. The general consensus is that if no agreement is reached, this date would mark the hard deult. The reason for the optimism is then that we are very close to full surrender in the form of a 90% participation rate of creditors and, we are told, it is only a matter of time before the final 10% agrees.
Quote Bloomberg (21 Jan 2012)
First of all, let us be clear. Despite, politicians mortal fright to use the D-word and the medias acceptance of this ct on the basis thatCDScontracts are not activated under the PSI, this is a stone wall deult [1]. Anyone, who bothered to takeat the history of sovereign deultswill see that the current Greek situation fits well within the framework. Indeed, the proposition that this is not a deult because CDS contracts are not activated is ludicrous since in the vast majority of sovereign deults, the debtor country begins negotiations with creditors well before the actual deult is forced upon it. The ct that insurance contracts bought to protect a creditor involved in such negotiations have now been rendered useless says more about the nature of the our modern financial system than it does about the definition of a sovereign deult.
[2] In practice the ECB could do nothing and see its balance sheet shrink with the amount lost on the asset side (i.e. reduce lending to the banking system (delevering) with the amount lost on the bonds). However, in the event of a large loss beyond provisions (if any) it is likely that the ECB would &8220;need&8221; to credit reserves with the amount lost on Greek bonds (hence printing money) it would do this by increasing open market operations (the LTRO essentially) on the asset side. I mention the liability sidefirstthough since the mechanism would essentially bedeleveraging. Whenever a bank takes heavy losses on loans it usually responds by raising capital AND reducing lending. Since the ECB cant really issue debt in the same way as commercial banks, it would need to either reduce lending OR if that is not possible, issue liabilities to match the loss of which it is, as a central bank, free to do at its leisure.
Global stock markets are up about 10% since the beginning of the year, volatility has collapsed, USeconomic datacontinue to defy even the mild slowdown proponents and the ECB seems to have backstopped the Europeanbankingsystem.
The details reported so r are as follows;
Of course, once we reach this point the issue of CDS contracts will rear its head yet again since if a 50-60% haircut can be considered voluntary anything beyond this becomes very difficult to characterize as such. Any rating agency would find it difficult not to classify further losses as a deult and thus begins the fun in earnest. And then comes the ECB and IMFs share. It will be political dynamite if the ECB had to print on the liability side to cover losses on the asset side on Greek sovereign debt [2] or if the IMF had to ask its contributors for extra cash to cover for losses on loans made out to Greece or any other economyEconoMonitor_ stock market game. Obviously, much will be done to prevent this, but just look at the numbers of Greeces economy and you will see that it is not that outlandish, especially if Greece opts to stay in the euro zone. Finally, Greece only represents the starter here. Any deal agreed to in Greece will be ardently watched in Ireland and Portugal who will feel they are entitled to the same deal with their private creditors.
EconoMonitor_ stock market game,Yes, my dear reader. This is how quickly you move away from the apocalyptic abyss and back to normal. My base case is that we are close to excess complacency in equity markets and a sell off is overdue, but it is exactly also under these circumstances (where smart money start to hedge) that the market may deliver one final run up to get everyone and the postman in before hosing everyone.
[1] I know that the legal smarty pants will wade in now noting that deult is only used when a payment is missed, but ct of the matter is that sovereign debt restructurings and deults throughout time have always been a long process. Claiming that the Greek situation is different because it is allegedly voluntary and CDS contracts not activated is pathetic in my view, nothing less really.
Dan Alpert&039;s Two CentsCongratulations to Daniel Alpert on being appointed a fellow of The Century Foundation, one of the oldest think tanks in the United States. Dan is a founding Managing Partner of Westwood Capital, LLC and its affiliates. He has more than 30 years of international merchant banking and investment banking experience, including a wide variety of work-out and bankruptcy related restructuring experience.
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First act of several to come
Hence, we come to the real nature of this game.
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In the short term, one of the only remaining stumbling blocks in the form of the ongoing deult proceedings inGreeceseems to be no match for the ongoing positive animal spirit of the equity market. Only a week ago, we got newsthat talks in Greece had stalled, but most recently we have been reassured thattalks are back on track.
Let me be clear, absolutely clear, here. Within any conceivably realistic macroeconomic model, there isno waythat Greece can reach a stable debt level with moderate growth under these conditions. Under the interest rate scenario noted above (let us say with an average interest rate of 3.8% on the new debt) the nominal interest rate would still be substantially higher than the growth rate of the economy. The only way, thenominaldebt level could then be kept stationary is by forcing the fiscal balance into surplus. However, the problem is that this affects the denominator in the debt/P calculation by sucking out demand (growth) from an economy already structurally impaired (within a currency union and all that).
The parties are near an initial agreement under which old bonds would be swapped for new 30-year securities carrying a coupon that would begin at 3.1 percent, reach 3.9 percent and go as high as 4.75 percent, Athens-based news Proto Thema reported on its website yesterday, without saying where it got the information.
Most tragedies have several acts, twists and turns. Investors should expect no less from the one currently being played out in the European sovereign debt markets.
This post originally appeared atClaus Vistesen&8217;s Blogand is posted with permission.
The desired macroeconomic outcome of all this is obviously well advertised. In 2020, Greece is supposed to have a government debt to P ratio of 120% and presumably some form of growth that would allow this level of debt to stay stationary or perhaps even decline over time.
The implications are obvious I think . The promises of stability that the PSI currently holds (even if it comes with considerable pledges of IMF money) are bound to disappoint.
The deal which now seems to be close to completed by no means closes proceedings. It is very likely in my opinion that private creditors who are currently the only ones being forced to take a haircut due to seniority of the IMF and the ECB will ce a near 100% loss on their holdings. The argument is . Given the amount of debt held by the ECB and the IMF and the ct that these two institutions are senior debt holders the debt held by private creditors becomes junior debt and thus the tranche which takes the first (and in my opinion likely complete) loss in the event of a deult.
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The main niggle on the first occasion appeared to be what kind ofinterest ratethat investors would get on their new bonds and thus, ultimately, the loss of ce value currently said to be 50% but also, by some, claimed to be as high 62.5%. Another issue would be whetherGreecewould pass legislation that forces investors to participate in the debt swap if a majority of investors agree to the PSI terms. This was specifically being discussed in the context of a particular group of investors holding both CDS contracts and the underlying bond and who would maximize their payout on the former by forcing through a hard deult.
