A good deal for Greece, its creditors, and Europe
Amid all the doom and gloom about Greece in the last few weeks, it is easy to overlook an important piece of good news: the debt exchange offer published by Greece on Friday with endorsement by its main private and official creditors. If implemented, this would be a major achievement and an important step toward overcoming the euro zone crisis, almost regardless of what happens next.
Under the offer, bondholders would receive 15 percent of the face value of their bonds in the form of short-term European Financial Stability Facility (EFSF) bonds, plus a set of new Greek sovereign bonds maturing between 2023 and 2042, with a 31.5 percent face value.
This agreement is a very good deal for Greece. The combination of the cut in face values, lower coupons and (in most cases) longer maturity implies a debt reduction of about 60 percent in present value terms (evaluated at a 5 percent discount rate). Assuming high participation (about €200 billion in bonds), this translates into savings of about €120 billion, or 54 percent of Greece’s 2011 GDP. This is very large. By comparison, the Argentine exchange of January 2005, the previous high-water mark, generated present value of debt relief of only about 29 percent of GDP, because although the per-dollar debt reduction was higher, the volume exchanged was much smaller.
Private creditors are also getting a good deal. Although they are being hit hard, they could have done much worse. You will see claims that the “haircut” suffered by creditors is on the order of 75 percent. These are exaggerated, because they compare the present value of the new bonds with the face value of the old bonds. But in a pre-default debt exchange, creditors never have the right to full immediate repayment. They only have the right to keep their old bonds and expect them to be serviced.
A better way to determine the value of the new bonds is to compare them with the present value of the old bonds, assuming they both are subject to the same default risk. This leads to a haircut of about 65 percent — much less than what creditors would have lost in a disorderly default. And it does not reflect two additional benefits: “GDP warrants” that may deliver extra payments beginning in 2015, depending on the level of Greece’s GDP; and an effective upgrade in creditors’ rights compared with those of the old bonds. The new bonds will be issued under English law, making them harder to restructure again in the future, and their repayments will be linked to repayments to the EFSF.
Finally, the agreement is a good deal for Europe — not because it guarantees a good outcome, but because it takes some really bad outcomes off the table. The risks of the new EU-IMF package for Greece are well-known: It assumes a large and protracted reform effort in an economically depressed country where both politicians and the “troika” are deeply unpopular and social tensions are high and rising. And even if the debt exchange is successful, Greek debt will remain very high. Yet the proposed debt exchange and the program that underlies it differ fundamentally from previous instances of “kicking the can down the road.”
Take the worst-case scenario: Following the debt exchange, the program goes offtrack in just a few months, and Greece is cut off from any further borrowing. This would aggravate Greece’s economic downturn and force it into even more austerity to avoid running a primary deficit. But it would no longer lead to a catastrophe. Assuming high participation in the exchange, Greece would face almost no net debt repayments in 2012 and just €1.25 billion in interest payments on the new bonds in 2013. Hence, it would not need to default, let alone leave the euro. Furthermore, Greece would no longer represent a contagion threat, and with a recapitalized banking system, and little or no remaining government deficit, it could likely manage its crisis on its own — at least until large repayments to official creditors begin to fall due in 2014.
from James Saft:
Waiting for Europe’s QE to sail
The good news is that the European Central Bank will probably start a massive additional round of quantitative easing to fight the break-up of the euro zone.
The bad news is that they will, as ever, only choose the right policy, as Winston Churchill said of the Americans, after exhausting all of the alternatives.
Global share markets rallied furiously on Wednesday, fed by hopes that the ECB would increase its bond-buying efforts, a possibility raised by its chief Jean-Claude Trichet in an appearance before the European Parliament. Trichet faces stern opposition inside the ECB from fellow central bankers, notably German Axel Weber, who believe that policy should be normalized rather than loosened.
This opposition, in combination with an unsure political climate, means that euro zone authorities will probably continue to try to buttress, enlarge and formalize the bailout mechanism while trying to maintain the fiction that something approaching normality reigns in European money and bank funding markets.
Why would QE be used to fight the break-up of the euro zone, now being widely discussed as the crisis spreads to ever larger member states?
Because QE, or really we should simply call it the monetization of government borrowing, offers some hope of easing the austerity now being imposed on Ireland and soon to come in Portugal and Spain.
Europe has made a choice to not allow member states to default or to allow their weakened banks to default, as default would threaten banks elsewhere. That leaves weakened economies carrying a crushing amount of debt, debt they will attempt to repay by budget cuts. This is a recipe for an economic death spiral, as a smaller and smaller economy becomes less and less able to shoulder its debt service.
from James Saft:
Pension savers get the boot
From Dublin to Paris to Budapest to inside those brown UPS trucks delivering holiday packages, it has been a tough few weeks for savers and retirees.
Moves by the Irish, French and Hungarian governments, and by the famous delivery company, showed that in the post-crisis world retirees, present and future, will be paying much of the price and taking on more of the risk.
This goes beyond merely cutting back on pension benefits, rising to actual appropriation of supposedly long-term retirement assets to help fund short term emergencies.
Let's start with Ireland, which is kicking in 10 billion euros from its National Pensions Reserve Fund into an 85 billion euro package of support for its banks.
Trust me, this does not reduce the risk profile of the NPRF, which was set up as a sovereign wealth fund to help pay for state retirement benefits.
Putting aside jokes about sovereignty and wealth, of which there is appreciably less in Ireland than formerly, this is effectively a transfer of wealth from the Irish people to its banks. Or rather, to the institutions, mostly European banks, which hold Irish bank debt, none of whom as senior creditors will share in the pain.
In many jurisdictions if Ireland were a corporation and the NPRF part of the corporation's pension fund, then making such a move would be illegal, and quite rightly so.
Another good column by James Saft.
At the risk of appearing like a wild-eyed conspiracy theorist mumbling “Bilderbergers,” it does seem like a coup has taken place in the USA and the European Union. Nowhere in the bailout zone did we hear the sound of haircuts, though Angela Merkel hopefully has firmly grasped the clippers. Nowhere in the bailout zone did we hear that we could nationalize the banks, quickly reorganize them, and spit them out much smaller. Oh no, we just gave them billions of dollars with no conditions attached, leading to predictable bonuses and whining that they deserve obscene salaries for incompetence. Now we see the second act that Saft described, where the banksters raid pension funds to continue their quest for the holy grail — our grail.
I honestly think there is only one course of action left to the “little people”: a return to the heady days of Marie Antoinette and other characters whose intelligence and integrity were much improved by a skillful application of a heavy, sharpened blade.
http://saucymugwump.blogspot.com/
from The Great Debate UK:
How will the Eurozone crisis end?
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -
Back in 1997, when I wrote about the prospects for the forthcoming European Monetary Union, I said I expected something like the Greek crisis to end with a wave of bailouts of ClubMed countries, and I followed the situation through to what seemed its logical conclusion.
I guessed that Germany and the other surplus countries would realise they were caught in a can’t-beat-‘em-may-as-well-join-‘em trap. On balance, I think I stand by that forecast today.
The problem is of course that monetary union without fiscal union requires a willingness to leave member countries to stew in their own juice when they become insolvent.
In the current situation, this not an option because right from the start of EMU, Brussels used both direct and indirect methods to ensure that no invidious distinctions were made between the debt issued by member country governments.
So, in a regime that treated the bonds of all Eurozone countries as acceptable reserve assets, banks all over Europe (even in Britain) duly bought up sovereign debt with little regard for the creditworthiness of the issuer.
Many of the proposed exit strategies being discussed in the media are irrelevant because they miss the point altogether. The central structural problem in EMU is not that it has no stabilisation fund or any other mechanism for routinely channelling funds from surplus to deficit countries – in fact, the problem is not funding at all, it is enforcement.
I mix with many German people here in Portugal and a few weeks ago they believed that saving the € was the best course of action for political and monetary stability. How quickly views change since various EU member states have revealed their deficits with more losses looming. Personally I think Germany will return to the DM as the German people are more than a little annoyed at the deceit of some of their neighbours, unless countries such as Greece and maybe one or two others are forced out of the €.
The American economy is supporting such massive debt it is difficult to see how the $ can continue to maintain it’s current level. While China continues to grow as the manufacturing powerhouse of the Western World, most Western currencies will continue to decline, except Germany because they understand what makes a stable economy.
Euro woes increase risk of trade wars
Europe won’t just be exporting deflation to the rest of the world, it will export serious trade tensions as well: first between the United States and China, and, possibly, eventually between Europe and the United States.
The austerity required to get Greece and other weak euro zone nations’ budgets in shape will exert a powerful deflationary force, as many countries which formerly imported more than they exported will be forced to cut back.
As well, the euro has dropped very sharply. Germany’s quixotic campaign against speculators — banning naked short selling against government debt and government credit default swaps — gave the euro its latest shove downward, but the trend has been strong for months. The euro is now about 15 percent below where it started the year against the dollar, making U.S. exports less competitive and adding to pressure on the United States to be the world’s foie gras goose: being force-fed everyone else’s exports while its own unemployment rate remains high.
That Britain is now embarking on its own round of budget cuts will only make matters worse, adding up to one more important actor trying to consume less and export more courtesy of a devaluing currency.
Perhaps the best outcome is rising trade and currency tensions between the United States and China, while at worst this could set the stage for broader conflicts and a round of tit-for-tat tariffs to match similar currency devaluations.
Michael Pettis, a professor at Peking University, explains the issue succinctly on his blog, in which he says: “Make no mistake, if southern European trade deficits decline, someone somewhere must bear the brunt of the corresponding adjustment. The only question is who?”
The scale of the adjustment is large; taken together Spain, Italy, Portugal and Greece account for about 16 percent of global trade deficits. Add in France, which will surely share some of the pain, and we get up to about 20 percent. You simply cannot have savage recessions and budget cutbacks in these countries without it exerting a powerful force on their trade partners.
it is a monopoly game played by all the major stakeholders who push global trade to new heights. It’s all about profits – certainly not to ‘save 3rd world countries’ give me a $%@$%$#% break.
Certainly agree with ‘jbemory’. Buy local. That also means boycot mcdonalds, burger king, dennys’, target, walmart, homedepot.
scary isn’t it!Are there any mom-pops left at all?
Euro zone medicine not working on banks
Fear of lending to banks is rising again in Europe, as even a 750 billion euro zone rescue package proves not enough to stem fears that the banking system will prove the weak link when southern European nations can’t meet their obligations.
Strikingly many European and British banks are now being forced to pay more to borrow money in the interbank markets than before the joint European Union, International Monetary Fund and European Central Bank package was announced two weekends ago.
That deal, which should insulate highly indebted countries such as Greece, Spain and Portugal from funding pressure for the next two years or so, was effective in driving down the extra interest those countries had to pay to borrow as compared to Germany. Tellingly, it was less effective, even counter-productive, in restoring calm to the markets in which banks fund their short-term borrowing needs.
While the mutual distrust is still far less than the utter panic during the crisis following the collapse of Lehman Brothers in 2008, it is very significant that the bailout of the weak links in the euro zone is having far less of a multiplying effect than earlier infusions of cash and liquidity into solvency shortfalls.
It may be simply a passing tremor. It may be a result of structural weakness in the euro zone, as investors bet that when push comes to shove a politically fractured Europe will find it impossible to agree on how to underwrite and fund the rescue of banks facing losses if Greece and its peers default.
It might, even more interestingly, be a sign that the medicine of government rescue packages works less well the higher and higher you go up the world’s capital structure. After all, the banks two years ago were rescued by governments, which were bigger. Small governments are now being rescued by bigger governments. Will Mars or Saturn have cash to contribute when it is Britain, or, whisper it, the United States, which needs help?
WILL BANKS BE LEFT HOLDING THE BAG? The three-month dollar London interbank offered rate (LIBOR), a compilation of the costs banks report they must pay to borrow, rose to 0.46 percent on Monday, having risen steadily since concern over Greece became acute, its highest level since last summer. Also rising markedly is the spread between LIBOR and an overnight indexed swap (OIS), a measure of unwillingness to lend that, because it strips out interest rate fluctuations, is considered a more pure indicator of bank solvency fear. It now stands at about 24 basis points, about double the rate in February but far below its crisis peaks.
It is not “quite likely” that Greece will be forced to restructure its debts in the medium term…
The assets of the Greek state are higher in value than its total debt of 300bn. Current cash deposits in Greek commercial banks are also almost equal to the same amount.Finally,total private external and internal debt is much smaller that in any other Eurozone country and the actual size of the Greek economy is at least 40% larger than official data.
It is amazing how shallow are almost all analyses and how unfounded are most predictions about the future of the Greek economy!
Europe shambles as Greek fire spreads
Europe desperately needs to get out in front of its solvency problem, Greek edition; not because it is right, not even because it will work in the long term, but to stem rapid and costly contagion through financial markets to other weak links in the euro zone, not least to banks.
Whether euro zone institutions will have the agility and resolve to quickly put in place out-sized measures for Greece is doubtful.
That Greece on Wednesday was paying more than 20 percent, or about double the rate of Hugo Chavez’s Venezuela, to borrow money for two years showed that investors were expecting either a default or very large burden sharing by existing creditors, and possibly a, by definition, disorderly exit from the euro by Greece. Spain joined the list of sovereign downgrades, as Standard & Poor’s cut its rating a notch to AA, a day after the debt rating agency slashed Greece to junk status and cut Portugal to AA.
The moves prompted rapid widening of Spanish and Portuguese debt, and hit financial markets world-wide. Investors, lulled by an apparently miraculous government-underwritten escape from the banking crisis, and aware of how badly things would go if Greece were not bailed out, had been operating on a cheerful if lazy assumption that this crisis too would be made to disappear, because the alternative is too horrible.
Month has followed month, meeting has piled upon meeting and even with broad consensus there is still huge lack of clarity about who in the European Union is going to do what exactly to whom.
It has, frankly, become surreal. German Chancellor Angela Merkel opined on Wednesday that, “We are on a good path now,” while in the next breath saying “I think the handling of the Greece case shows that everyone knows we cannot allow the same situation with countries as with Lehman Brothers.”
Everyone may well know it, but not everyone, including many politicians in Germany, are acting that way and dropping the L-word without already having a massive, credible plan to brandish is foolish in the extreme.
I agree with the other posts. Slave labor is essential to the US economy. Illegal immigrants are vital. Nothing makes me happier than to see people living in abject poverty and working for less than slave labor wages. Especially on construction sights, where legal immigrants and citizens could make a living wage hanging sheet rock or laboring. No, no…it is much more beneficial to pay people $250 per week for 80 hours of work. They are never late to the job when they are living in their van in the parking lot. Yeah illegal immigration!
Greece an ideal Goldman client; profitable, culpable
Goldman Sachs has a lot to be thankful for – huge bonuses, massive taxpayer subsidies, unrivalled political influence – but in Greece they have finally found nirvana: a highly profitable business partner who can also credibly serve as the villain in the piece.
Goldman is widely reported to have arranged a swap transaction for Greece early in the last decade structured in such a way as to provide the country with $1 billion upfront in exchange for higher payments much later.
That later bit is key – it helped to mask over-borrowing by Greece from the euro zone’s budget watchdogs in Brussels, not to mention from Greek taxpayers and the buyers of Greek debt, all of whom have a right to fully understand the risks of a country incurring liabilities which perhaps it may struggle to repay.
Greece’s deficit has grown to such a size as compared to its ability to generate revenue that it will now require a rescue package from its euro zone partners, or if not may face the dire possibility of a default or exit from the currency union.
Other banks, mind you, are likely to have facilitated similar deals, and if they didn’t I’m betting it wasn’t for lack of trying.
The New York Times has reported that Goldman arranged other deals for Greece, the common denominator of which seems to have been getting money upfront.
Greece paid Goldman about $300 million in fees for a 2001 deal that helped it borrow “billions,” according to the Times, a set of figures that implies this deal was either enormously large, fantastically complex or that Greece was, shall we say, price insensitive.
Let Greece to default, and the bankers eat the losses. This is going to be a bloodless revolution. Russia survived a bloody Bolshevik revolution, Hitler came and went. Greece will survive.All parties involved will learn a lesson, good for the next 49 years. Hopefully Americans will also learn something new.
Who wins in U.S. vs Europe contest?
In these days of renewed gloom about the future of Europe, a quick test is in order. Who has the world’s biggest economy? A) The United States B) China/Asia C) Europe? Who has the most Fortune 500 companies? A) The United States B) China C) Europe. Who attracts most U.S. investment? A) Europe B) China C) Asia.
The correct answer in each case is Europe, short for the 27-member European Union (EU), a region with 500 million citizens. They produce an economy almost as large as the United States and China combined but have, so far, largely failed to make much of a dent in American perceptions that theirs is a collection of cradle-to-grave nanny states doomed to be left behind in a 21st century that will belong to China.
That China will rise to be a superpower in this century, overtaking the United States in terms of gross domestic product by 2035, is becoming conventional wisdom. But those who subscribe to that theory might do well to remember the fate of similar long-range forecasts in the past. At the turn of the 20th century, for example, eminent strategists predicted that Argentina would be a world power within 20 years. In the late 1980s, Japan was seen as the next global leader.
The latest pessimistic utterances about Europe were sparked by a debt crisis in Greece which raised concern over the health of the euro, the common currency of 16 EU members. Plus U.S. President Barack Obama’s decision to stay away from a U.S.-EU summit scheduled for May in Madrid, with a new EU leadership structure that should have made it easier to answer then U.S. Secretary of State Henry Kissinger’s famous question: “Who do I call when I want to talk to Europe?”
There are still several numbers to call in the complex set-up, giving fresh reasons to fret to those crystal-gazers who see the future dominated by the United States and China, the so-called G-2.
Pundits who see the European way of doing things as a model for the United States (and others) to follow are few and far between, not least, says one of them, Steven Hill, because most Americans are blissfully unaware of European achievements and, as he puts it, “reluctant to look elsewhere because ‘we are the best.’”
As foreigners traveling through the United States occasionally note, the phrases “we are the best” and “America is No.1″ are often uttered with deep conviction by citizens who have never set foot outside their country and therefore lack a direct way of comparison. (They are in the majority: only one in five Americans has a passport).
EU has today also the largest military by Libon treaty and the most dangerous weapon on Earth set on french SSBN:The M51.
Don’t bank on EU’s tough state aid talk
– Paul Taylor is a Reuters columnist. The opinions expressed are his own –
PARIS, April 20 (Reuters) – The European Union’s antitrust czar is struggling to stop governments bending EU rules on state aid to business when they rescue banks with taxpayers’ money.
But Neelie Kroes’ threat to force some banks to the wall unless they offer viable restructuring plans within six months of receiving state cash was economically unwise and politically inept. It could fuel political pressure to suspend the rules and weaken the European Commission’s crucial watchdog powers.
EU regulators in charge of policing state aid have given fast-track approval to more than 50 rescue schemes since last October, when the full force of the financial crisis hit Europe after the collapse of Lehman Brothers in the United States.
Kroes told Reuters in an April 7 interview that time was running out for some banks to propose restructuring plans that in most cases would mean slimming down and selling off assets to avoid distortions in competition. “Brussels will not rubber-stamp such schemes and may even let banks go bankrupt if those plans do not satisfy the Commission,” the EU Competition Commissioner said. She is very unlikely to make good on her threat because of the depth of the crisis and fierce political pressure from big member states to go easy on the banks. Brussels would do better to give banks and governments more time to get over the worst of the crisis before restructuring or repaying aid, rather than making banks divest now at fire-sale prices that would cause bigger losses for taxpayers.
Kroes implicitly acknowledged as much on April 15 when she approved a request from Britain to extend recapitalisation and credit guarantees for its banking sector, approved last October.
A Commission statement said “the circumstances on the financial markets justify the extension which aims at underpinning lending to the UK real economy”.
I bet the Trojans thought the same thing when the wily Greeks gave them a going away present in the form of a horse.