Background to the latest bailout

Leaked Memo Blows The Lid Off Of The Entire Greek Bailout

Joe Wiesenthal

Business Insider,

20 February, 2012

At least Europe is no longer in denial about the effects of austerity in Greece, and the ability for the country to improve its economic situation via drastic cuts.

Peter Spiegel at FT has obtained a confidential 10-page memo distributed to senior officials in Europe over the last week, which lays out the truth:

It warned that two of the new bail-out’s main principles might be self-defeating. Forcing austerity on Greece could cause debt levels to rise by severely weakening the economy while its €200bn debt restructuring could prevent Greece from ever returning to the financial markets by scaring off future private investors.

“Prolonged financial support on appropriate terms by the official sector may be necessary,” the report said.

What's more -- and this Spiegel puts in a follow-up blog post -- all the economic assumptions being used are too rosy, further rendering prospects of a successful bailout unlikely.

He also has some excerpts from the note, including reasonable downside expectations if things don't go swimmingly:

Under the tailored scenario described above, the debt ratio would peak at 178 percent of GDP in 2015. Once growth did recover, fiscal policy achieved its target, and privatization picked up, the debt would begin to slowly decline. Debt to GDP would fall to around 160 percent of GDP by 2020, well above the target of about 120 percent of GDP set by European leaders. 

Financing needs through 2020 would amount to perhaps €245 billion. Under the assumption that stronger growth could follow on the eventual elimination of the competitiveness gap, the debt ratio would slowly converge to that in the baseline, but likely only in the late 2020s. With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the program highly accident-prone.

Again, basically what it shows is that European leaders can't deny what everyone sees as obvious: That everything undertaken so far is destroying the Greek economy, and that further reforms will only make it worse.

UDPATE: For more from the debt sustainability report, see here >

Here is the projected growth levels for Greece - LOL

Greek CDS Trigger Priced In

Zero Hedge,

21 Febraury, 2012

As the Greek parliament supposedly votes on the introduction of CACs into the outstanding Greek government bonds (governed under Greek law), the Greek bond and credit derivative market has reacted strongly. The price for the basis package (buying the Greek bond and simultaneously buying credit protection on that bond) has jumped to six-month highs and Greek CDS has broken to 73% upfront (record highs). Prices of some GGBs are up today - driven by technical demand for bond-CDS basis traders and also demand for some of the more liquid UK-law bonds - but most are down with the short-end suffering the greatest losses. The bottom line is this shift in the CDS and bond market for Greece suggests a very high likelihood of a credit event 'trigger' in the not-too-distant future and while net notionals are manageable and collateralized, there is always gap days (like today) which mean big cash needs for collateral managers and the unknowable impact of the daisy-chain of gross notionals to worry about.

The jump in the price for the basis package - which moves to 100 in the event of a trigger event theoretically, implies a very high probability of a trigger event occurring in the very short-term.

Most GGBs are lower in price with the hope-full short-end holder suffering the most. The green oval shows some outperformers (beware the thinness of markets) which represent both technical demand from Bond-CDS basis buyers as well as demand from traders looking for UK-law bonds.

Charts: Bloomberg