This Is Really Only The "Second" Greek Bailout?

If you're into Greece you've probably already read all about it and if you're not I can't make you. But in brief: Greece is fixed and we will NEVER HEAR ABOUT ANY PROBLEMS EVER AGAIN. In less brief:
(1) Some folks stayed up all night and produced a statement.
(2) Greece's private creditors will be offered the long-anticipated opportunity to voluntarily exchange their old bonds for new bonds, which will for the most part be the same as the old bonds except for minor differences including but not limited to a greatly extended maturity (to 2042), a 53.5% reduced face amount, and a 3.6% blended interest rate.
(3) If they don't voluntarily exchange, which they will because - hilariously - they've already taken accounting writedowns (and also because I guess it's better than a disorderly default), private holders will get CAC'ed, which may or may not be as bad as it sounds, but in any case at least CDS will pay out, unless it doesn't.
(4) Also the public sector will do various helpful, confusing things.
(5) In exchange for this, Greece will enact horrible austerity, and because no one believes that Greece will actually do that, there will be escrow accounts and what Reuters ominously calls "permanent surveillance by an increased European presence on the ground."
(6) Everyone is pretty sure we'll be doing this again in six months and, look, just fair warning, I will not be writing about it then, because feh.

We haven't had a serious international bankruptcy, which this pretty much is, since I started paying attention to the financial markets, two months ago, so I mostly think about insolvency from a US bankruptcy law perspective. One thing that happens in bankruptcy is that, like, really really roughly speaking, the creditors stop being creditors and become the owners. This isn't always the case but the basic playbook of US bankruptcy law is:

1. There's a thing that (a) has stuff and (b) has issued debt and equity.
2. That thing gets itself into a situation where the face value of the debt is bigger than the market value of the stuff, and also it can't keep paying the debt.
3. So it files for bankruptcy.
4. And the equity is canceled.
5. Also the debt is canceled. Or, like, a portion of it, or the most junior tranches, or whatever. The point is that the goal of the bankruptcy is to get the debt below the value of the stuff. So you have to get rid of some of the debt.
6. But then: the canceled debt is exchanged for equity. That is, the guys who had the debt that was canceled, or some fulcrum-y portion of it, get to own the thing. Because somebody has to own the thing - there has to be a residual claimant in case the stuff turns out to be worth more than the face value of the (reduced) debt.
7. So now there's a thing that (a) has stuff and (b) has new equity (held by old creditors) and debt (but less of it)
8. It goes merrily or un-merrily along.
9. The new equity holders maybe make a lot of money because the thing is in awesome shape and the stuff increases in value and they're sweet sweet equity holders. Or not because they sold out of their equity day one and someone else gets the upside. Or not because the stuff decreased in value and the equity is worth nothing and go to step 2. Or something in between.

One benefit of this system is that it's great for the creditors. I mean, "great" is relative, but the guys who end up owning the thing have upside, if the thing has upside. If the thing doesn't have upside then they're screwed, but that would be the case no matter what. But if it does have upside then they can get made whole, or more than made whole, for their initial losses. This is sometimes why people buy the debt of alarming-looking companies - hoping that there'll be a bankruptcy and they'll end up being the owners for cheap.

Another benefit is that it's good for the thing. Maybe you don't care about the thing's continued career as a successful thing, but maybe you do. A bankruptcy of the auto industry that proceeds along the lines above - i.e. somebody, new or old money, ends up owning equity - allows the auto industry to continue employing people and making SUVs, because the new equity owners want to get a return on their investment. That gives them an incentive to try to run the business successfully, rather than just harvest it for parts.

This is obviously not what happens with international insolvency. There's a pretty straightforward reason for that which is that the thing - Greece - has no "equity." Or, rather, you could probably find some equity, but if you did you couldn't "cancel" it. So to a reasonable approximation the Greeks are the residual claimants on the performance of Greece - anything left over after debt service goes to them in the form of public services or just, y'know, not paying it in taxes to pay debt service. You couldn't cancel those residual claims - you can't say "well, you owe Germany more than you can pay, so from now on all Greek GDP goes to German banks" - because the equity holders are also the employees and, y'know, the everything. You could imagine more limited equity transfers, AND BOY DO PEOPLE EVER DO THAT, with lots of people saying things like "Greece should give Germany the Acropolis and three islands to be named later," because if there's one thing German banks know well it's how to manage tourist attractions.

All of that sounds friggin' terrible for Greece, and when you put it that way - "all the earnings of Greece [or , at least, of the Acropolis] should go to German banks in perpetuity" - then of course it is. But remember those benefits. Right now, if you own Greek bonds, you get, whatever, 30 cents on the dollar in NPV. Maybe you have some upside if Greek interest rates go lower than the contracted rate over the next 30 years but ... riiiiiight. Basically you're just hanging on hoping to get some of that 30 cents back. You actually do get some supposed upside in the form of detachable GDP warrants, which pay up to an extra 100bps of interest per year if unspecified GDP targets are met, but these are pretty hastily sketched out and perhaps not all that appetizing on a security that pays 2 or 3% interest for the next 10 years.

And then there are the public creditors. Felix Salmon says:

As in all bankruptcies, the person providing new money gets to call the shots. And it’s pretty clear that the Troika is going to have to continue providing new money long through 2020 and beyond.

So the Troika - IMF, ECB, EC - will keep calling the shots. But they have no explicit upside - no GDP warrants, for instance, and no other adjustment to their paper if Greece's economy does well. So they look good if they get paid back, and avoid another default in six months; they look bad if the rioting in Greece gets bad enough to ... stop Greece paying back its debt. A non-default level of rioting is fine.

Arguably the Troika has some incentive to at least say nice things about the Greek economy recovering, especially with that awkward IMF chart predicting a recovery to trend GDP growth by 2014 or so. But for the most part the only people who gain materially by an unexpected improvement in the Greek economy are the Greeks. And they are no longer the ones making decisions on things like austerity, payment schedules, etc. So it should not be surprising if those decisions are made to maximize - within a limited range of options - the chance of repayment of the modified debt, rather than to maximize - again, from a set of bad choices - Greece's chances of an economic recovery.