Greeks Might Just Pull This Thing Out

"Some promising things have happened."

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Updated:: Jan 14, 2019
Original:: Jun 22, 2015

Alexis Tsipras may yet escape this guy's fate.

Europe’s long continental nightmare isn’t at an end. It may not even be at the beginning of the end. But, after Athens proposed making employers pay some more into its pension system so that it could pay less, it is, perhaps, the end of the beginning.

“Some promising things have happened, including today’s talks,” said European Council President Donald Tusk. “The latest Greek proposals are the first real proposals in many weeks….”
A first assessment from the institutions overseeing Greece’s bailout—the European Commission, the European Central Bank and the International Monetary Fund—found the new plans to be “broad and comprehensive,” said Jeroen Dijsselbloem, the Dutch finance minister who presided over the talks….The Greek proposal has been described by Greek and European officials as possibly the country’s final chance to unlock its bailout program and avoid a potentially catastrophic exit from the eurozone. Negotiations between the creditors and Greece would now continue “with a view of reaching a final agreement later this week,” Mr. Dijsselbloem said.

Greek Bailout Proposals Lift Hopes of Deal [WSJ]

Sort of.

There's that famous scene in Liar's Poker - are there non-famous scenes in Liar's Poker? - where the much maligned equity department sends a program trader to impress Michael Lewis's jackass fellow Salomon trainees with his brilliance. It does not work: He lectured on his specialty. Then he opened the floor to questions. An M.B.A. from Chicago named Franky Simon moved in for the kill. "When you trade equity options," asked my friend Franky, "do you hedge your gamma and theta or just your delta? And if you don't hedge your gamma and theta, why not?" The equity options specialist nodded for about ten seconds. I'm not sure he even understood the words. ... The options trader lamely tried to laugh himself out of his hole. "You know," he said, "I don't know the answer. That's probably why I don't have trouble trading. I'll find out and come back tomorrow. I'm not really up on options theory." "That," said Franky, "is why you are in equities." This is totes unfair to the actual equity vol traders I know, but I kind of felt like that guy after talking to a CDS lawyer yesterday about this craziness in Greece. It went something like this: Me: As an equity derivatives guy, I expect derivatives to transform into derivatives on whatever their underlying transforms into. And I'm troubled by them not doing that. Lawyer: You should not be troubled by the concept of cheapest to deliver. Yeah fair! That's the thing about CDS. Dopes like me think of it as just a rough proxy for default risk but when things get real like with Greece it turns into a cheapest to deliver convexity play and then I slink away in embarrassment. But yeah, as a matter of rough justice, if you can go be opportunistic about finding the cheapest to deliver bond, Greece can go be crappy about leaving you with only expensive to deliver bonds. I guess.

By myself (Own work) [Copyrighted free use], via Wikimedia Commons

Plus, it’s not like it’s really over or anything.

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:

Germany and France are going to agree to disagree on this one.