Greece
Changes Strategy: No Longer Demands Debt Write Off, Proposes Debt
Exchange Instead
2
February, 2015
Over
a week after the new Greek government came to power, it has presented
its first actual proposal of how it hopes to negotiate with Europe
that does not involve the infamous "debt write off", which
as both Germany and the ECB have made clear, is a non-starter as it
impairs the ECB's balance sheet and leads to a loss of "faith"
in the money printer, the legacy monetary system and so on. So
instead of yet another debt restructuring, the FT
reports that
Yanis Varoufakis "would no longer call for a headline write-off
of Greece’s €315bn foreign debt. Rather
it would request a “menu of debt swaps” to ease the burden,
including two types of new bonds."
Actually he still does, only he is not calling it as such.
The first
type,
indexed to nominal economic growth, would replace European rescue
loans, and the second,
which he termed “perpetual bonds”, would replace European Central
Bank-owned Greek bonds.
Of
course, the problem immediately emerges when one considers what we
explained a long time ago: namely
that a distressed debt exchange,
such as what Greece is proposing, is what the rating agencies have
always deemed an Event
of Default,
and thus something which the ECB will never agree with as it once
again impairs an ECB-held security.
To
be sure, the Greeks themselves realize that this proposal is nothing
but a debt haircut under a different name, but hope that Europe will
pull an Obamacare and bet on the "stupidity
of their own taxpayers" to
let it slide without anyone noticing.
To wit: "[Varoufakis]
said his proposal for a debt swap would be a form of “smart debt
engineering” that would avoid the need to use a term such as a debt
“haircut”, politically unacceptable in Germany and other creditor
countries because it sounds to taxpayers like an outright loss.
This would mean that in order for such a deal to be successful, the
Troika would have to bribe Moody's and S&P to keep their mouths
shut and to "exclude" Greece from their traditional event
of default definition (something which the recent DOJ "settlements"
could provide assistance with).
Another
aspect of the proposal is the Greek desire to link debt, or rather
interest, to GDP, which begs the question: what happens if Greek GDP
continues to decline - does Europe pay the Greeks a negative
interest? Sarcasm aside, there are two problems with the Greek
GDP-linked proposal. The first, and most important one, is that it
won't work. As Reuters
explained over
a year ago:
Some of the world's leading economists have united behind the concept of bonds linked to GDP, which they say could prevent painful debt restructurings like those in Argentina and Greece.
The Bank of England last month published a paper on GDP-linked bonds, joining Yale University and the International Monetary Fund, which have also pushed the idea in recent years. "Return on these bonds varies in proportion to the country's GDP," the bank wrote.
But investors say the idea will never fly.
"This is an interesting academic exercise, but I believe it is unlikely that we will ever see widespread issuance of GDP-linked bonds," said Mark Dowding, a senior portfolio manager at Bluebay, one of Europe's largest bond funds.
In theory, GDP bonds would allow countries to manage debt-servicing costs depending on their economic cycles, in essence providing a form of recession insurance. At the same time investors could take comfort knowing that they would not be subject to a Greek bond-style haircut on their sovereign holdings.
Yet purchasers of the debt would likely demand a return high enough to nullify a sovereign's other benefits in issuing such an instrument.
"I know investors who would buy these kind of products," said Gabriel Sterne, an economist at distressed debt brokerage Exotix.
"But I don't know any who would accept them unless they were compensated significantly for the uncertainty of income streams."
And
the second one is that Greece already has GDP-linked securities:
warrants, as does Argentina. And in the case of the latter, it failed
miserable to avoid a re-default.
Both Argentina and Greece offered GDP-linked warrants as a sweetener to encourage bondholders to take drastic writedowns on their sovereign holdings.
"It's the equivalent of receiving equity in a corporate restructuring," said a debt specialist at an investment manager with over US$100bn under management.
"If things really turn around, you get exposure to the performance."
In the case of Greece, investors attributed little value to the warrants at first. But as the country's economic outlook has improved, trading in these securities has ratcheted up. The warrants, which slumped to a low of 25 cents in the first months after Greece's restructuring, are now worth more than five times that amount.
...
Furthermore, governments would be less willing to build a significant buffer of GDP-linked bonds in a good economic climate, as it would then be more expensive to service them.
And once the GDP-linked warrants became a significant part of Argentina's debt-servicing costs, for example, investors feared the country would be unable to pay them.
Greece learnt from Argentina's experience and capped the coupon payments on its warrants at 1% of the notional amount annually, with a call option from 2020.
Then,
in addition to the "haircut
that is not a haircut",
the new FinMin has proposed that the government would "maintain
a primary budget surplus — after interest payments — of 1 to 1.5
per cent of gross domestic product, even if this meant Syriza, the
leftwing party that dominates the ruling coalition, would not fulfil
all the public spending promises on which it was elected."
This
also is confusing since the only time a nation should maintain a
budget surplus is if no longer needs external funding or, if it
intends to defaults as the CFR explained over
a year ago.
Ironically,
by promising to preserve a primary budget surplus, Greece is warning
the Troika that it can default at any moment, and thus intends to
preserve its bargaining leverage.
And
then there is the last aspect of the Greek proposal, that the
"government would target wealthy Greeks who had not paid their
fair share of taxes during the nation’s six-year economic slump.
“We
want to prioritise going for the head of the fish, then go down to
the tail,” he
said."
We
wish them good luck, especially since it was not just the wealthy
Greeks but everyone who decided
to stop paying all taxes heading
into the dramatic Syriza election. And if there is one thing
taxpayers are loathe to do once they stop paying their taxes, it is
to resume paying their taxes.
Still,
while the proposal is surely another non-starter for Europe, what is
most substantial in the FT report is that, like it or not, the Greek
government has decided to play ball with Europe and is slowly but
surely willing to concede to the Troika's demands. Which means that
any expectations of a sharp standoff between Greece and the ECB can
now be written off, as the new Gree finmin has just made it clear
that despite the bluster and rhetoric, he will ultimately accept
whatever terms Europe offers him.
Perhaps
most ironic, while Greece has proposed a debt
haircut in
all but name, what it now seems almost assured to end up with is a
continuation of the current status
quo.In
all but name.
Early
Dip Becomes Manic Rip After FT's "Greek Non-Haircut Haircut"
Article
2
February, 2015
Anyone
trying to trade today's equity, bond, or crude markets likely feels
like this now...
ow...
An
epic day of intraday volatility in almost every asset class (except
precious metals) as shitty macro data in the US was trumped by 'hope'
that an FT article on a Greece solution would save the world (but is
in fact a non-starter).
To
translate - this afternoon's manic buying panic was because Greece
requests a debt reduction under a more palatable name...
Wild
swings today...
Managed
to scramble S&P 500 cash index back above the crucial 100DMA...
S&P
tops 2,000 and the 100DMA
Were
stocks trying to catch up to oil's meltup?
Bonds
were not buying the exuberance at all...
Energy
stocks led the day... from the NYMEX close yesterday stocks are
mostly flat...
But
Energy credit was not falling for it again
On
the day, Treasury yields ended modestly higher...
And
thanks to the late-day exuberance, the USDollar rallied back to
almost unchanged... thanks
to USDJPY's surge
and
commodities were relatiovely well behaved apart from crude...
which
was total craziness...
Charts:
Bloomberg
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