Rubber ducks explain the Greek negotiations

By Felix Salmon
February 10, 2012
a done deal in Greece?

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Is there really a done deal in Greece? I hope so — but it’s pretty clear that nothing’s in the bag quite yet. In terms of my video above, the Greeks consider themselves in the boat at this point — but the Europeans worry that the Greeks might go back on their promises, so they want not only the Greek executive but also the Greek legislature to sign on. (I didn’t even have a duck for the Greek legislature, I thought the only legislatures we needed to worry about were in Germany and Finland.)

And the IMF duck isn’t in the boat either — Christine Lagarde, too, is demanding further “assurances Greece would stick to the agreed policies whatever the outcome of looming elections”.

It seems that the bondholders are in the boat, however — or as far in the boat as they can credibly get absent a formal bond exchange offer. And that’s why I’m not sold on Floyd Norris’s idea that the money Europe is providing for Greece will instead end up in an escrow account, to be used first to pay bondholders and only second to cover the Greek budget deficit.

If that were the case, the value of the exchange offer would rise markedly: the new bonds would certainly be repaid, and would be worth 100 cents on the dollar, rather than the 60 cents or less that everybody’s expecting right now. It would be a multi-billion-dollar gift to bondholders who expect much less than that, in a context where a few billion dollars could well make the difference between a successful deal and a failed one. If there’s effectively going to be an EU/IMF guarantee of the new Greek bonds, then the nominal haircut would surely be bigger than 50%, and I haven’t heard anything along those lines.

Basically, what’s going on here is that because the bondholders are already in the boat, no one needs to do them any favors. What’s needed is an agreement between Greece and the Troika — something acceptable to both sides, and which the Troika believes that Greece will hold to. Even as sensible people like Mohamed El-Erian can see clearly that that’s not going to happen. “I suspect all three parties to the negotiations know in their heart that their latest agreement, brave as it is, will only last a few months at best,” he writes. “Within a few months, the negotiating parties are likely to be back at the table bickering while Greece continues to stare into the abyss.”

Or, to put it another way, that overloaded pirate ship is very precarious. And even if it manages to get everybody on board now — which is far from certain — it could still easily capsize a few months down the road.

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