Things in Cyprus: kinda bad. There are better places than here to read about it; I particularly recommend Joseph Cotterill here and here, pseudo-Paweł Morski here and here, Mohammed El-Erian here, the FT’s coverage here and here, the Journal’s round-up of analyst reaction here, etc.
The basic story is that Cyprus’s government and banks are both massively overindebted and need a bailout, and the EU and IMF will provide a €10bn bailout, but they demanded that Cyprus chip in some €7bn, which it has decided to do by means of a tax on deposits in Cypriot banks of 6.75% for up to €100,000 and 9.9% above €100,000. (Is that rate on bigger deposits marginal or absolute? No one knows!) Those numbers are being renegotiated and may end up not being approved by Cyprus’s parliament.
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.
Cure For What Ails Banks May Be Less Securitization And Trading, Or Much More Securitization And TradingBy Matt Levine
There’s a lot of The Future Of Banking in the news today and we should talk about it but first a proposition. Where are you more likely to lose money on a mark-to-market basis: buying 5-year PIK-toggle holdco Petco bonds at 8.6%, or buying 30-year UPS bonds at 3.625%? I say your odds of losing on UPS are higher; if you disagree, you take Petco, and we’ll meet here in 30 years to settle up.
Here is a grab-bag of other numbers related to UPS:
- It paid its underwriters 87.5 basis points to underwrite those 30-year bonds, or about 3 basis points per year of financing.
- Its credit facility pays its banks 4.5 basis points a year on undrawn amounts; on drawn amounts it pays Libor + 10 or more basis points.1
- It has $1.775 billion of commercial paper outstanding with an average interest rate of 0.07%.
Things to think here include:
- lending money to UPS is not profitable for banks2;
- underwriting UPS’s 30-year bonds isn’t exactly a bonanza either; and
- UPS would be nuts to borrow from its banks – so it doesn’t, and borrows more cheaply in the market.3
Bank lending to high-investment-grade companies is (1) a loss leader, (2) used to attract not especially profitable business, and (3) not competitively priced. I feel like other industries do loss leaders better.
While you ponder that, also ponder this IMF working paper on banks and trading. A quick takeaway is “banks shouldn’t trade, urgh, trading bad,” and Mark Gongloff and Felix Salmon take that takeaway away, but as far as I can tell the more interesting bit is this: Read more »
“The International Monetary Fund is expected to contribute just €13 billion ($17.07 billion) to a second Greek aid package worth €130 billion, leaving euro-zone governments to provide a much bigger share of funds than they did in the euro zone’s three earlier bailouts, people familiar with the situation said” [WSJ]
Strauss-Kahn, who was with his wife French TV personality wife Anne Sinclair, drove himself to the headquarters of the International Monetary Fund and met briefly with his successor and fellow French national Christine Lagarde. He later addressed a packed auditorium out of reach of the cameras of televisions crews and photographers who had camped outside the IMF all day waiting for the former director. “He received a very warm welcome,” said Paulo Nogueira Batista, who represents Brazil and a group of eight Latin American countries, after the meeting. “It reflects the fact that he is very much appreciated in the institution,” Nogueira Batista said, adding: “People clapped for very long periods.” Another witness, who asked not to be identified, said staff broke into spontaneous applause before Strauss-Kahn began speaking. [Reuters, earlier]
Strauss-Kahn, who resigned in May, “has indicated that, on a personal visit to the Fund later today, he would like to have the opportunity to say goodbye to staff,” according to an e- mail sent to employees and obtained by Bloomberg. “All staff who would like to do so can meet with him this afternoon.” The e-mail, which wasn’t signed, indicated that the meeting would take place from 4:30 p.m. to 5:30 p.m. [Bloomberg]