Sovereign debt bubble thread

[Crazy_Ivan80]

"The Germans are also right to resist Eurobonds. Under current EU structures, this amounts to a demand that Germany and other solvent euro users should underwrite the debts of southern European countries, while being given no control over their spending. When a leaked German paper suggested that an EU overseer should be given some control over the Greek budget, the proposal was shot down amid the usual volley of complaints about resurgent Nazism."

If the Germans have any smarts they must resist this completely. Do not become the Flanders of the EU. If you're going to pump money in those states be damn sure that you control how the money is used.

[Sheilbh]

This is an interesting scoop:

More on leaked Greek debt deal documents
February 15, 2012 3:37 pm by Peter Spiegel

This morning, the dead tree edition of the FT has a story based on some leaked documents we got our hands on regarding the massive Greek debt restructuring that needs to begin in a matter of days.

The documents make clear the schedule is slipping dangerously; the meeting of eurozone finance ministers tonight that has been cancelled was supposed to approve the launch of the restructuring so the process can begin Friday. The whole thing needs to be done before a €14.5bn Greek bond comes due for repayment March 20. Time is running out.

But perhaps more interestingly is the fact that eurozone finance ministries asked for financial advice from New York financial advisors Lazard and legal advice from the New York firm of Cleary Gottlieb Steen & Hamilton about what the consequences would be if they launched the debt restructuring – but were forced to scrap it after it had started.

As is our tradition, we thought we'd give Brussels Blog readers a bit more on what the documents had to say.

The two separate notes, distributed to members of the "euro working group" – senior national finance ministry officials who have been doing all the spadework on the Greek programme – make pretty clear eurozone officials are suddenly finding themselves worried about the whole deal collapsing because of all the moving parts that need to be tied down for a successful restructuring to be completed.

They also make clear the biggest problem they're worried about is parliamentary approval of the €93.5bn in cash and bonds needed to execute the restructuring, which will happen through a bond swap where private debt holders trade in their €200bn in bonds for new ones worth half that. It may sound counterintuitive that eurozone governments have to cough up €93.5bn in order to wipe €100bn of debt off of Greece's books, but we'll get back to that in a moment.

The real problem, according to a memo sent last week to accompany the legal and financial advice, is that eurozone parliaments that need to approve the funds – which include the increasingly obstinate German, Dutch and Finnish legislatures – will not know for sure if Greece has lived up to its side of the bargain before they vote.

"(I)t is likely that not all prior actions [by Greece] can or will be implemented by the time Member States need to start the parliamentary approval procedure for the second increase," the memo reads.

The most recent in a series of a constantly-changing "tentative timetable" for the debt swap, which we also got our hands on, has the parliamentary approval process beginning tomorrow. Given the cancelled finance ministers meeting tonight, that will not happen.

So what happens if a parliament rejects the funds after Greece has already made the debt swap offer? The Cleary Gottlieb memo makes clear that they could withdraw the offer as easily as they made it. For the uninitiated, "HR" refers to the "Hellenic Republic" (Greece's formal name) and "GGBs" are "Greek government bonds":

The HR will only be required to indicate whether it has accepted eligible GGBs and consents once the invitation expires, as further described in the invitation. Until such time, the HR is not bound by the invitation, and can call it off, in whole or in part, at any time. It is currently estimated that the invitation will be open at least for approximately 10 to 12 calendar days.

But Cleary, which is also advising Greece on the debt swap, clearly doesn't like the idea of pulling the offer once it's made:

As with any transaction of this nature, it would be highly preferable to go to the market (launch the invitation) once the issuer (HR) has confidence that the conditions within its control (and within the control of the other official sector entities involved) reasonably can be expected to be satisfied. Each sovereign restructuring is unique and sets precedent. The adverse reputational consequences (for the HR as well as the rest of the EU) of launching a transaction that fails as a result of their collective failure to meet the conditions should be assessed very carefully.

Which raises the second issue dealt with in the memos: Should Greece make the offer without the €93.5bn in place? The timetable we obtained makes clear this is the route being contemplated.

The cash and bonds need to be raised by the eurozone's rescue fund, the European Financial Stability Facility, but several national parliaments must sign off before the EFSF can act. If the bond swap offer went forward on Friday, as was originally planned, national parliaments were not expected to finish their approvals until next Thursday, six days later. And all government officials involved would not have finalised the funding until the following Monday. In other words, funding would not be fully in place until two days before the bond swap offer was due to close, on February 29. Talk about your tight deadlines.

This is the topic of the Lazard memo. It noted that previously, all of this was due to be in place before the bond swap began – including the entire second €130bn Greek bail-out. But Lazard dryly notes that they have since been otherwise informed, and EFSF bonds, which will be used as "sweeteners" to attract bondholders to the swap, may not be ready beforehand after all.

The procedure that has been contemplated up to now is that prior to launch of Greece's invitation to tender, the EFSF would have agreed to extend credit to Greece [through a second bail-out] and issue the EFSF notes, subject only to the conditions set forth in the related Financial Assistance Facility Agreement. We understand that there is a possibility that the EFSF may be unable to commit to make the EFSF notes available to Greece before the launch of the offer as certain European parliaments may not have acted to approve the EFSF financing by the date of the launch.

Lazard, like Cleary an advisor to Greece, does not like this new set up much either. As with the Cleary advice, Lazard says it is indeed possible to launch the offering without all the money in place. But they don't recommend it:

We would expect this uncertainty to reduce the chances that the offer succeeds. Greece would in effect be asking creditors to commit the tender their GGBs and to block them for a period of as long as three weeks without having any assurance that Greece will be able to deliver the EFSF notes that it needs to deliver to close the exchange.

Lazard asks officials to put themselves in the place of a Greek bondholder. If you hold a Greek bond, even at current distressed levels, at least you can sell it. On the other hand, if you decide to agree to a swap and the deal falls through, you suddenly have a bond committed to a swap that won't occur as the market to sell it collapses. So why would you participate at all?

[C]reditors may miss opportunities to sell their bonds in the secondary market at a much higher price than will be available if the offer fails. Furthermore, this unusual condition could even expose creditors to the added risk that the secondary market shuts down and they will be unable to sell their GGBs at any reasonable price. In our view, the offer will be much stronger and the likelihood of obtaining the desired level of participation significantly higher if Greece can, as the market no doubt expects it will, announce in its invitation that the EFSF notes and the [related EFSF funding have been committed to Greece.

But that's not going to happen. Time has basically run out for all that to be done before the offering occurs.

Why does so much money need to be in place beforehand? Because the direct and knock-on costs of such a debt restructuring are enormous. First, there are the straight forward costs: €30bn has been promised to private bondholders as "sweeteners" to participate in the deal.

According to the documents, these will come in the form of €30bn in EFSF bonds, which are about as secure as you can get in Europe these days. So private investors give up €200bn in Greek bonds and get €30bn in EFSF bonds plus €70bn in new, long-term Greek bonds. That will cost €30bn from the EFSF, plus another €5.5bn in interest payments due on the bonds being traded in.

Then there are the indirect costs: Because Greek banks are the biggest holders of Greek sovereign bonds, they will basically be wiped out in the debt restructuring, meaning €23bn in recapitalisation needs to be in place immediately.

Then there is the slightly more complicated issue of liquidity for Greek banks. In order to finance their day-to-day operations, Greek banks have essentially been living on a lifeline from the European Central Bank. The ECB lends them money in return for collateral, and that collateral has been Greek bonds. Well, if the Greek bonds are suddenly worthless (they will be declared in "selective default" once the bond swap begins), another €35bn needs to be in place to back the bonds as "credit enhancements". Otherwise, Greek banks would shut down.

Add the €35.5bn for Greek bondholders and €58bn for Greek banks and you get a whopping €93.5bn. One caveat: the €35bn for "credit enhancements" will not be needed once the selective default period ends, which is expected to only be a few weeks, so in the end that money will likely be returned.

Still, it's a lot of money that needs to be raised very quickly on a timetable that is growing narrower by the day.

A friend of mine's a financial journalist who had some sort of scoop on Greek debt last week.  He explained it to me and meant nothing

Edit:  Also I think this is the perfect Telegraph article on Greece:
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100015016/greece-and-the-melian-dialogue-of-thucydides-obscure/
It's a lengthy quote of Thucydides, hinting at the Germans as Athens and the Greeks as the Melians

[Sheilbh]

I like this choose-your-own-adventure version of the Greek crisis:
http://crookedtimber.org/2012/02/16/so-what-would-your-plan-for-greece-be/

I got 27.  Official and private sector takes a debt haircut, IMF structural reforms, capital investment from creditor nations and the Greeks giving up a lot of political independence.

Edit:  Also Euro-solidarity lives, I heard that German enquiries into holidays in Greece are at a record high after a suggestion by some politician

[mongers]

I like this choose-your-own-adventure version of the Greek crisis:
http://crookedtimber.org/2012/02/16/so-what-would-your-plan-for-greece-be/

I got 27.  Official and private sector takes a debt haircut, IMF structural reforms, capital investment from creditor nations and the Greeks giving up a lot of political independence.

Edit:  Also Euro-solidarity lives, I heard that German enquiries into holidays in Greece are at a record high after a suggestion by some politician

I think you'll find that's properly called 'an Invasion'     

[Crazy_Ivan80]

I like this choose-your-own-adventure version of the Greek crisis:
http://crookedtimber.org/2012/02/16/so-what-would-your-plan-for-greece-be/

I got 27.  Official and private sector takes a debt haircut, IMF structural reforms, capital investment from creditor nations and the Greeks giving up a lot of political independence.

Edit:  Also Euro-solidarity lives, I heard that German enquiries into holidays in Greece are at a record high after a suggestion by some politician

I think you'll find that's properly called 'an Invasion'     

Only if they stay 4 years or longer

[Iormlund]

Spain, for the first time, obtained a surplus in its trade within the EZ in 2011. Despite very strong growth in exports to BRICs, overall trade deficit remains at over 10 percent however, mostly due to energy imports.

[The Minsky Moment]

This has become very, very ugly.  The leak of the IMF memo proves that not only is the proposed restructuring doomed to fail badly (which it doesn't take John Maynard Keynes to figure out) but that the trio (EC, ECB, IMF) already know that but are proceeding anyways.  This could never happen in America, because the Constitution still prohibits cruel and unusual punishment.

The restructuring proposal at this point involves a quantum of debt reduction that the Trio believes will be sufficient to wall off risk of further contagion but will do nothing at all to save Greece.  In return for this dubious benefit, the Greeks are being given an ultimatum to enforce a grab bag of measures that at best are pointless Titantic deck chair shuffling and at worse harmful and likely to make things worse.

it was a mistake to allow Greece to enter, but it was a mistake all the players made knowing full well of the issues, and on the explicit assumption Greece was too small to matter.  What should have been done in hindsight is just to bailout Greece in 2010 when it still could have made a difference and relatively cheaply at that.  Ideally by having the ECB create new money and pay off the "northern" creditors.  Of course that would not be permitted  . . .

The US and and the EU get into spats at times - some silly and some more serious.  But this is a matter of a whole different magnitude.  The EU is throwing one of their to the wolves so they can get a safer getaway. It is a failure of solidarity that strikes at the entire rasion d'etre of the institution.

[Sheilbh]

Alastair Darling said something rather similar:
http://www.scotsman.com/scotland-on-sunday/opinion/comment/interview_alistair_darling_1_2125370

Not that it's all Osborne's fault, he says. The Eurozone crisis is more than half of it. His assessment of the Greek crisis is astonishingly frank. "The policy they [European leaders] are pursuing towards Greece is sheer lunacy. Nobody actually believes it will work privately, if you speak to people." Even if everything worked, he notes that Greece would still have debts worth 120 per cent of its national income. "It will still leave the country so indebted and so crippled that it will never pay its way. Frankly, the solution is that it is going to default and the only question in my mind is does it do it in an orderly way, or does it do it in a disorderly way." Of course the Greeks have fiddled their books and leaders such as Germany's Angela Merkel have every right to be angry. "I understand all that, but I think to visit on a country like Greece frankly something that would have been worthy of the Treaty of Versailles is absolutely ludicrous. It just isn't going to work. And the risk is, of course, that if something goes wrong in Greece, then it spreads around the rest of the Mediterranean and Ireland."

The escrow account and apparent amendment to the Greek constitution is particularly astounding.  From what I understand Europe is now wanting the Greeks to have a constitutional amendment that makes the running of the Greek state subordinate to their official creditors. 

[Neil]

Greece should spike them out of spite.

[Tamas]

I understand the position that they don't want to rely on trust in Greece anymore, but all these demands... they are making compliance with them a non-option pretty fast.

Of course, that may very well be the political goal here right? If they contain the Greek default within their borders, we will be all the better for it, but no politican will admit that openly, especially not because of the "EU is letting a member roll over and die" angle.
So instead of being honest about it, they push Greece into defaulting, while the EU looks like it tried.

[Zanza]

http://www.economist.com/blogs/graphicdetail/2012/02/daily-chart-15
Rolling back the years

Feb 23rd 2012, 14:35 by The Economist online

America has lost almost a decade of progress to the financial crisis

TALK of a Japanese style "lost decade" has abounded ever since the financial crisis took hold in 2008. The Economist has crunched the numbers and on the basis of seven indicators covering economic output, wealth and labour markets, the United States has already gone back in time some ten years. Its GDP per person, for example, was at a higher level than today back in 2005 and its main stockmarket index was higher in 1999. Of the countries considered, Greece has fared the worst. In economic terms, it is just entering the new millennium again. As a whole the rich world has been hardest hit by the financial crisis. Just six of the 34 "advanced" economies categorised by the IMF have GDP per person higher in 2011 than in 2007. Notable among them are Germany and Australia.

[Iormlund]

I've found out today that another two people I know have been fired or will be shortly. And it's only been a week since the labour reform was enacted.

We'll get to 25% soon.

[MadImmortalMan]

Wow. 25% is just a completely non-functional economy. You could have Ide running strategic bombing missions against you night and day and not reach that level of unemployment. It's truly a remarkable achievement.

[DontSayBanana]

That's impressive.  As to some of the recent commentary about Greece, wow.  Greece should send people over to Iran and tell them, "THIS is what an attack on a nation's sovereignty REALLY looks like."

[Admiral Yi]

That's impressive.  As to some of the recent commentary about Greece, wow.  Greece should send people over to Iran and tell them, "THIS is what an attack on a nation's sovereignty REALLY looks like."

codswallop