The shadow government will offer a “whoopsie” and a “we’re kinda sorry” tomorrow for botching just about everything, re: bailing out Greece.
In an internal document marked “strictly confidential,” the IMF said it badly underestimated the damage that its prescriptions of austerity would do to Greece’s economy, which has been mired in recession for years.
How did it screw up? Let us count the ways.
It twisted and stretched—and ultimately ignored—its own criteria for qualification. With hindsight, it seems Greece should not have been eligible for assistance. Whoops!
It repeated ad nauseum that Greece’s sovereign debt was sustainable. Sorry! It wasn’t.
It overestimated the Greeks and their government. Turns out, they weren’t as interested in slashing everything at a time of mass unemployment as the IMF had thought. Or hoped. Or made up. Its bad.
It signed off on postponing a restructuring of Greek debt for two full years because some people (read: Angela Merkel) were worried that the Greeks couldn’t be trusted with a new credit card. This both prolonged Greece’s troubles and made things more expensive for everyone else (read: the Germans). Deepest regrets.
It didn’t count very well: Read more »
Last week ISDA, who are in charge of credit default swaps, circulated some proposed changes to CDS to account for all the Greek, Argentine, SNS, everything unpleasantness. This prompted me to try out my one journalistic technique – calling1 ISDA and asking them to send me a copy – but they declined, so we’ll just rely on this research note from JPMorgan’s Saul Doctor and Danny White. Here’s the gist:2
ISDA will publish a list of “Package Observable Bonds” (POBs) based on size, liquidity, maturity and governing law. The proposals suggest that there could be one domestic and one international law bond in each of the following silos – a) 1-3 years, b) 3-12 years, c) 12-30 years – based on a set of rules that determine the largest and most frequently traded bond in each silo. An initial POB will remain as such unless, prior to the Credit Event, it no longer meets the deliverability criteria, is called/matures, or is reduced below a threshold. New bonds would be added when a particular bucket is empty.
If a Credit Event occurs (Restructuring or other Credit Event) and a POB has been restructured into a package, then that package, in its entirety, will be deliverable into the auction. For example if a POB with a notional of $100m is written down by 50% and the remaining portion converted into 50 shares, then the 50 shares could be delivered against $100m of CDS. If there is more than one package on offer, then the one that has the highest subscribers will be chosen. All obligations meeting the deliverability criteria remain deliverable as long as they were issued prior to the Credit Event.
So lots of people have been calling for this for a long time – me least of all, but also real people like the Managed Funds Association and Darrell Duffie. But you get a sense from that summary of how it’s more complicated than dopes like me think. Read more »
Here is a thing that might be worth considering about this here Greek bond buyback:
That’s the entire history of the shortest-dated of bonds targeted for a buyback at, you might notice, their all-time high price.1 Various people have various reactions to this but one reaction that no one can have is of the variety of “well, I paid more than that to buy it, so I’m not selling it to you for less, since I live in a non-mark-to-market dreamworld.” Nobody paid more to buy these bonds than Greece is planning to.2
At least, not in money. Some people paid for these bonds in suffering; others – most others – paid for them in the form of old Greek bonds, which once upon a time were, I guess, worth 100 cents on the dollar. Later, they weren’t. Eventually they were rounded up in a restructuring where every €1,000 of old bonds got exchanged into €315 face amount of new bonds, €150 face amount of let’s say par-ish EFSF notes, and €315 face amount of Greek GDP-linked securities which were worth around nothing. The total package was worth around €210-250, depending on what day you looked at it, which if you do the math assuming the EFSF bonds were worth par and the GDP warrants zero, gets you a value for those new bonds of €60-100, or 19 to 32 cents on the dollar of face amount.3 Read more »
I suppose we have to talk about Greece. Things occurred yesterday! The main things are here and here, basically the Troika is pleased that Greece has done everything right, to some approximation, and therefore they are disbursing some new loans and revising the terms of their old loans to make things even better, and all will be well by the time the aid program concludes in, I believe I have this right, 2057.1
The particular things that are or might be happening are, officially:
- Greece is getting €43.7bn in new loans from the European Financial Stability Fund,
- Its old, direct loans from other EU countries will have a 100bps lower interest rate than they used to, and its old and new EFSF loans will have a 10bps lower “guarantee fee cost.”
- The old and new bilateral and EFSF loans will have be extended by 15 years, and the EFSF loans’ interest will be deferred for 10 years.
- The other EU countries will give Greece the profits from Greek bonds they bought at a discount in previous support programs.
- Greece will try to buy back some public bonds in the open market at prices “no higher than those at the close on Friday, 23 November 2012,” which means about 35 cents on the dollar (16.3% yield) for the ten-year.
This structure – except for the last part, which is just fun2 – is designed to accomplish the two perennial goals of: Read more »
I appear to be in the minority here, and it may have to do with my not really having any money in the market (or elsewhere!), but for a long time I’ve found the news out of Europe very soothing. In part this is because I am a congenital optimist and so a sucker for can-kicking, but it is also in part because I realized that I didn’t need to pay any attention to it. There’s an evergreen quality to the euronews where you can ignore it for two months and come back and pick up right where you left off:
Euro finance chiefs left unanswered how they’ll fill a fresh hole in Greece’s balance sheet without tapping their own bailout-weary taxpayers for money after giving the country two extra years to trim its budget deficit. …
Prospects of a funding deal at a hastily scheduled Nov. 20 meeting were clouded by objections from the International Monetary Fund, which took issue with the ministers’ decision to postpone the goal of getting Greece’s debt down to a “sustainable” level of 120 percent of gross domestic product by two years to 2022.
The highlights here – can-kicking, important questions left unanswered, disagreements between people at the same press conference1 – are perennials, and you’ll miss them if anything ever actually changes. I know I will.
“If I were the Germans, if I were running Germany, I would have abandoned the eurozone last week…It is a costly decision, but losses are there and somewhere, somehow, the losses have to be taken. The first loss is the banks. In the case of Greece, one should have kicked out Greece three years ago. It would have been much cheaper.” [BloombergTV]
No human can realistically be expected to understand or focus on the constant stream of Eurozone gyrations and in fact humans increasingly don’t, with the half-life of blather-driven euphoria declining rapidly. The latest gyration seems to be that Germany is contemplating letting the Eurozone collective rescue funds think about maybe one day putting up for discussion the possibility of considering buying bonds of distressed countries directly to try to drive down funding costs for those countries.
This seems to have helped Spanish yields more than did the announcement earlier this month that those funds might consider giving Spain €100bn in special senior debt to get its banks sorted, for sort of obvious reasons. If the EFSFSMCBFFFFF is buying hundreds of billions worth of Spanish bonds right alongside whatever brave dopes are buying them already, that buying pressure should push up prices and push down Spanish borrowing costs and improve Spanish sustainability in a virtuous circle etc. etc. If the EFSFSMCBFFFFF is instead putting in its money at a more senior level than those bondholders, then those bondholders are subordinated and, empirically, sad about it.
One weird thing though is that there is little assurance that “EFSFSMCBFFFFF buying the same bonds that everyone else is buying” is actually the same thing as “EFSFSMCBFFFFF ending up with the same bonds that everyone else is buying.” The (not yet ratified!) ESM treaty maybe requires the ESM to be senior to market creditors (maybe!), but also maybe allows it to buy market bonds, which generally are not senior to themselves. Seniority is ordinarily a matter of contract: if you buy one of a series of totally fungible publicly traded bonds, you generally expect to be treated pari passu with the rest of those publicly traded bonds.
Ordinarily! Read more »