Looks like some talk of raising the ESM to €750bn as well. Haircut appears to have been raised from 50% to 53.5%.

Debt-stricken Greece won a second bailout after European governments wrung concessions from private investors and tapped into European Central Bank profits to shield the euro area from a precedent-setting default.

Finance ministers awarded 130 billion euros ($173 billion) in aid, engineered the central-bank profits transfer and coaxed investors into providing more debt relief in an exchange offer meant to tide Greece past a bond redemption next month.

Bondholders’ response to the swap, Greece’s tolerance of more austerity and a gantlet of parliamentary approvals in northern European countries gripped by an anti-bailout mindset loom as risks to the latest salvage operation.

http://www.bloomberg.com/news/2012-02-21/greece-wins-second-...

Hi

It is interesting that the private sector is taking a 53% haircut, yet the central banks are not taking part in this "haircut", but instead are not taking interest on their bonds until 2020.

The only reason I can think this is happening, is so the private sector writes down its debt, yet the central banks don't have to.

Watching CNBC this morning, I've been highly amused by the enormous amount of experts who've been keen to say that this bail-out doesn't solve anything and Greece will still ultimately default. They've completely missed the point that no-one cares what Greece ultimately does since, if the worst was to happen, the rest of Europe will have further strengthened itself and the risk of contagion will be far less than it would be if they had defaulted now. More importantly, everyone is focusing in on the 120% of debt to GDP as if that is the only thing that matters whilst completely ignoring the incredibly low interest rates that Greece will be paying on their new debt. That alone is worth a fortune to them and is more important than the absolute amount of debt. See where the new debt trades if you don't believe me because it won't be at levels that suggest 3% for Greece is a fair rate!

The fact that the new debt will probably trade at a fraction of its nominal value end up all kind of possibilities in terms of retiring it early in a truly voluntary exercise providing another haircut to bondholders, which buyers at today's levels won't object to. I ultimately think that Eurobonds are on their way within a couple of years and I can easily see a situation where New Greek bonds will be exchanged for Eurobonds with another write off from face value.

There's been some rotten analysis of what's happening in the media but one guy on CNBC unknowingly hit the nail on the head this morning when he said that anyone investing in the market is simply gambling on what politicians do. He went on to make a prick out of himself by saying it was impossible and that it wasn't "proper" investing. I'd say it is investing, all right, just not the kind that he's used to and predicting what politicians will do is the single most important thing an investor needs to think about in this market. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath. We were given a big hint a few months ago that politicians were going to throw an increasingly huge amount of money at this to prevent contagion and they've duly delivered. Long term, I don't know what the effects will be since there are still major problems out there but I'm still massively overweight in bank subordinated debt. It's looking increasingly secure with the weight of cash supporting the system.

WShak

The only reason I can think this is happening, is so the private sector writes down its debt, yet the central banks don't have to.

It's all down to accounting at the end of the day. The central banks can't take a capital loss. On the ECB it appears they intend to keep their bonds and let them mature then give the profit back to the member countries who will then donate the money back to Greece (wishy washy beyond belief but I guess if it gets the deal done).

B

Yes I agree the media has got the wrong end of the stick. I think the journos start with a style which is usually along the lines of "the end of europe as we know it is neigh" and then try to write the story around it. The let off for Greece is actually quite enormous. It reminds me of the old question "what price do you put on a zero coupon perpetual with a AAA credit rating?". The answer is that they are worthless. In this case we have a 30year not perpetual and the coupon is very low. From the borrowers perspective these are a dream.

The important point for the long term is that measures are going to have to be put in place in Greece where they are going to have to make changes and return their economy to growth over the next few years. If they can do this and no doubt again reschedule their debt perhaps by a buy back with Eurobonds (these new bonds will be very cheap to buy back) then there is light at the end of the tunnel.

There's been some rotten analysis of what's happening in the media but one guy on CNBC unknowingly hit the nail on the head this morning when he said that anyone investing in the market is simply gambling on what politicians do. He went on to make a prick out of himself by saying it was impossible and that it wasn't "proper" investing. I'd say it is investing, all right, just not the kind that he's used to and predicting what politicians will do is the single most important thing an investor needs to think about in this market.

Yes, I think this is a very important observation.

The investment syllabus has changed and many folk, certainly me, find it hard to get their head around the current forces driving equities and bonds. As I mentioned in the recent thread the market is now like a hollywood movie where the good guys repeatedly appear to thwart the bad guys, usually leaving their appearance to a late moment when everyone thinks the bad have triumphed.

The folk who have taken this on board have done well.

Those who have been focusing on what might happen down the road have been missing out on dramatic moves.

Regards,

In the article in the FT this morning it states that European central banks hold €12Bn of Greek bonds, the ECB has €55Bn and the IIF represent private holders with €200Bn. From memory Greece has a total debt of €350Bn, does anyone know who is holding the other €83Bn? If its another offical holder presumably it won't get haircut, if its private holders then they could get taken out with the expected CAC.

I expect political pressure will get the bailout through the various parliments, the only real potential short term problem I can see is the English law bonds that are held by the hedge funds, I doubt they bought them to take a 70%+ haircut. If I was them I would wait until everyone else had tendered their bonds and then demand a better deal by threatening an English court case.

Regards

Unwize

He went on to make a prat out of himself by saying it was impossible and that it wasn't "proper" investing. I'd say it is investing, all right, just not the kind that he's used to and predicting what politicians will do is the single most important thing an investor needs to think about in this market. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath.

I would agree with the commentator it is gambling not investing. Nothing wrong with that provided it is recognised for what it is. If you take a bet you win or lose or to quote the preceding ….. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath..

All very well, but those who, for example, are trying to build up a pot for retirement, then the opportunities for investment in the traditional sense seem to be fast disappearing.

He went on to make a prat out of himself by saying it was impossible and that it wasn't "proper" investing. I'd say it is investing, all right, just not the kind that he's used to and predicting what politicians will do is the single most important thing an investor needs to think about in this market. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath.

I would agree with the commentator it is gambling not investing. Nothing wrong with that provided it is recognised for what it is. If you take a bet you win or lose or to quote the preceding ….. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath..

All very well, but those who, for example, are trying to build up a pot for retirement, then the opportunities for investment in the traditional sense seem to be fast disappearing.


Back in November, Sebastian Lyon (of Troy Asset Management) - someone whose investment strat floats my boat - wrote the following, which is pertinent:-

"Adam Smith’s invisible hand of the market has been replaced by the
clunking fist of the state. Government intervention has brought
politics front and centre. This has been most apparent in the
reregulation of banks but the fingers of government intrusion are
slithering into additional areas of economic activity. In this
phoney world there is no longer reality in markets or the cost of
money, only distortions. eBay may be the last true free market
remaining. Fund managers hanker for the days when corporate
earnings and valuation were their prime concern. Unfortunately the
need to second guess policy action is just as important.

Russell Napier of CLSA told me recently, governments have become
like football referees, who when the match is not going their way,
pick up the ball and change the rules to suit them. This adds to the
challenge."

Hi Guys,

You won’t be surprised to hear that I’m pretty sceptical about the bailout “deal” announced this morning.

I still think/guess it’s 50/50 whether or not this deal will fall apart by March 20th. And even if it passes that hurdle and is finally implemented, I still fear that Greek Euro exit would be inevitable sometime after the April elections - maybe quite shortly thereafter.

Reasons:

* We all have different interpretations of the politics involved here, but last nights events have strengthened my suspicion that the Germans (particularly Schauble/Finance Ministry) and their Northern Allies now want Greece out of the Eurozone and don’t want this deal to proceed. They’ve put in multiple pre-conditions before the deal can be finally approved, and the deliberate leak yesterday of the damning IMF sustainablity report seems to have been calculated to increase the political problems the deal faces. The text is available here, and it’s damning, showing that it is virtually certain that Greece will require yet further and very substantial long term bailout monies beyond this package:

http://www.macrobusiness.com.au/2012/02/greece-sustainabilit...

* Schauble’c comments in the press conference were hardly a ringing endorsement:

“We insisted that the parameters of debt sustainability of 120 pct of GDP will be maintained just like the 130 billion as an upper limit for the second Greek programme…All of that now depends on the reaction from the private sector and besides, it’s all conditional on Greece fulfilling the prior actions.” (translation: the deal’s not done yet).

* To me, it still seems uncertain whether the PSI, with the haircut now increased, can actually achieve the 95% acceptance levels needed to generate the required £100m Greek debt reduction - particularly given the position of the €18.5bn English Law bonds. The IIF’s comments in its statement were hardly a ringing endorsement: they have had to take a 53.5% reduction in face value rather than 50% they had previously agreed, and with the coupon on the proposed new Greek bonds reduced to 2% in the early years the NPV haircut is now 75% or more rather than the previous 70%. Charles Dallara in this morning’s press conference described the idea of CACs as “in principle, not a good idea at all”. Yet Greece has in recent minutes released details of the proposed bond swap, and it will indeed include CACs:

http://www.minfin.gr/portal/en/resource/contentObject/id/7ad...

* The combination of the ECB having subordinated other bond holders to its own holdings and the use of CACs seems likely to trigger CDS payments. If that happens then any Greek bond holder who has CDS protection would appear to have little or no incentive to agree to the PSI - or am I missing something?

I could go on with what I see as further specific risks to the implementation of the deal, but the above is probably enough to give a flavour for the uncertainties involved.

If I’m correct in my suspicions, and that this is still very much not a done deal, why didn’t Schauble and his allies simply block it last night? I think it comes down to politics - they don’t want to be seen as the people who kill the deal and push Greece out of the Euro, and they didn’t have a consensus for that last night. And despite all the EU’s protestations, they’re probably still very insure about being able to contain the impact of a disorderly default. Hopefully, given the implementation risks the deal faces between now and 20th March, some serious planning will be taking place regarding how to shore up the Greek banking system in the event that the deal doesn’t actually proceed as planned - because that’s what really matters to markets.

I agree with WShak that judging this short term is now all abut trying to interpret the politics, and my view on that is no better than anybody else’s. It;s unpredictable! But FWIW, whereas to WShak and Bertee the politics show the EU as progressively getting its act together, to me they indicate profound and growing disagreement! Well, time will tell I guess, and two views make a market! But for me the risks of these deal falling apart are still too great, so I’m still mainly in cash and (probably foolishly) have actually been buying out of the money June S&P put options this morning as a hedge against my remaining equity positions.

A

As I've said before the devils in the details and I look forward to see what they are. For now here is an article/blog from Open Europe who are as sceptical as me if not more so

http://openeuropeblog.blogspot.com/2012/02/many-questions-ar...

Regards
DJSlam

Hi mathsman,

I would agree with the commentator it is gambling not investing. Nothing wrong with that provided it is recognised for what it is. If you take a bet you win or lose or to quote the preceding ….. If you get it right, the rewards are great but, if you get it wrong, you're going to take a bath..

All very well, but those who, for example, are trying to build up a pot for retirement, then the opportunities for investment in the traditional sense seem to be fast disappearing.

My position is that all investment is a gamble, so to describe a particular method of investment as "impossible" simply because the commentator is no good at it makes him a bit narrow minded. I think the opportunities for traditional investment are less than they used to be in the good old buy and hold days of the pre 2000 bull market but PEs and yield have never really done it for me so I'm perfectly happy with markets like we've had. Volatility in portfolio value is high but I enjoy it.

Hi avidya,

* The combination of the ECB having subordinated other bond holders to its own holdings and the use of CACs seems likely to trigger CDS payments. If that happens then any Greek bond holder who has CDS protection would appear to have little or no incentive to agree to the PSI - or am I missing something?

If I was them, I'd tender my bonds and claim on the CDS as well since they're sure to be triggered just as Iirsh ones were due to the use of CACs. Wouldnt they do better that way, as long as a credit default event is deemed to have occured?I think the whole CDS thing has been completely overblown anyway - can anyone think when they actually caused any debt tenders to stall? I can't.

I agree with WShak that judging this short term is now all abut trying to interpret the politics, and my view on that is no better than anybody else’s. It;s unpredictable! But FWIW, whereas to WShak and Bertee the politics show the EU as progressively getting its act together, to me they indicate profound and growing disagreement! Well, time will tell I guess, and two views make a market! But for me the risks of these deal falling apart are still too great, so I’m still mainly in cash and (probably foolishly) have actually been buying out of the money June S&P put options this morning as a hedge against my remaining equity positions.

I actually don't think there is a lot of difference between the way in which we both invest but a crucial difference in opinion on how the Eurozone is likely to pan out obviously means that we end up taking radically different positions. Neither is stupid position to take and it wouldn't take a lot to persuade me to take a very bearish view. One thing would have been the Germans being emboldened by declining Italian bond yields and risking a Greece exit in a messy default. Sentiment can turn on a dime and they would be crazy to think that the recent increased confidence could be relied upon - things are still too fragile. That's why buying more time is so vital and why I think things have been handled well, despite a media view that leaders have been dithering.

I've also thought about buying some June puts but the market isn't overbought enough yet IMHO and timing is so important when buying options. Hopefully, fixed income will hold up in a general bout of profit taking anyway - there's quite a bit of froth building up in average quality equities which aren't particularly bear market resilient and I'd expect them to get hit hardest.

WShak

Hi Was,

Agreed, you’re right that if CDS contracts are anyway going to be triggered, then Greek bond holders who also hold CDS protection might might as well sell the bonds/accept the offer, because they’ll collect on the CDS insurance anyway. But the reason I thought bond holders who hold CDS protection might hold out was due to some conversations I’ve been having with people today who’ve suggested that the Greeks may still be trying to structure the PSI offer in such a way that it maximises the chance of CDS contracts not been triggered. There’s an influential recent article by Gulati and Zettlemeyer (dowloadable from the link below), which suggests how this might be done. It’s complicated, but involves bond holders who accept the offer being deemed to appoint the exchange agent to vote for a CAC only in certain circumstances. If this procedure is used, then hold outs with CDS insurance might have to keep holding out to force default in order to trigger the CDS contract.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1993037

Sorry, this is probably all far too “geeky” for this macro board, and more suitable for the banking board!

But I’ve been looking into this in quite a lot of detail today, because it seems to me that the success or otherwise of the PSI will be pivotal to whether or not the Greek bailout can go through in its current form. There are about €40bn of Greek bonds which were issued under non-Greek law (though only €18.5bn of those are under English Law). It seems both anecdotally and from the price action of some of these bonds in recent months (and indeed their current market price premium to the proposed PSI terms) that they have been accumulated by hedge/distressed debt funds. I’m very interested in what these holders might do in relation to the offer, and how Greece intends to approach them - both because it might give an edge on judging whether or not the bail could still could be scuppered, but also maybe there could be some trading opportunities in individual bonds?

Anyway I think Dallara of the IIF is about to be interviewed on exactly this subject on Newsnight so I must rush off and watch what he has to say!

A

Most interesting to me was not that almost everyone hates the Greek deal and almost everyone thinks it won’t last, but that US treasury yields rose, especially the longer dated:

http://stockcharts.com/h-sc/ui?s=$FVX&p=D&b=5&g=...

This is just one day and everything could change tomorrow but there is no great fear in the US treasury market and perhaps the long awaited bond bear market has begun. Whether the departing treasury money is going into equities is unknowable, but the movement is inconsistent with the media hate for the deal.

The other feature that caught my attention was the continuing move in oil with WTIC continuing to rally:

http://stockcharts.com/h-sc/ui?s=$WTIC&p=D&b=5&g...

It doesn’t look like this oil move is due to $ which has shown weakness but not dramatically so:

http://stockcharts.com/h-sc/ui?s=$USD&p=D&b=5&g=...

This also tells us that at least for today folk are not fleeing the Euro as one might expect if big money shared the media’s pessimism for the Greek deal. There are many commentators arguing that oil’s strength is a sign of an Israel-Iran war, but it could also reflect more optimistic views of growth, although high oil won’t help US retail.

Regards,

OK I’ve just seen what Dallara had to say on Newsnight. He basically said that he hoped/was confident that the bulk of investors would accept the PSI because it’s in everybody’s wider interests to do that. Certainly that’s true of the major bank holders of the debt. But individual distressed debt funds??

WShak, the reason why I think this issue may be important is that although the net Greek CDS outstanding is only around €3.7bn, the gross amount is far higher - according to the DTCC the gross amount outstanding is circa €75bn. The people who hold the CDS contracts and the people who’ve written them aren’t the same people. Greek sovereign CDS contracts are currently trading over 70. If a CAC can be used in such a way that CDS contracts aren’t triggered, but nevertheless the CAC forces 100% conversion of the bonds, then the CDSs could be worthless. I don’t know how to find out how much of the €75bn gross Greek CDSs are actually held by hedge funds who also hold Greek debt. But even if it’s only 20% of it - say €15bn - that would still be a massive incentive for these holders to try and ensure that Greece really does default by holding out so that the CDS’s are triggered.

So following the above train of thought through, paradoxically it might be in the interests of Greece to structure the PSI so that the CDS contracts are certain to be triggered, rather than try and avoid that? I wonder how far the Greeks/EU have thought this through? Presumably they must have done, because they’ve got some vey bright people advising them. But I’ll be very interested indeed to see the detailed documentation on the exchange offer when it comes out!

A

Hi avidya,

I'd certainly agree that the non-Greek law bonds which are currently trading far higher than the others are a major cause for concern. I wonder just how strong the particular group of hedge funds holding these actually are though? Some of the usual suspects who were buying Irish banking debt were quick to disassociate themselves from the notion that they might prove difficult in restructuring Greece's debts and most of the larger institutions must be very conscious of the shit storm coming their way if their names become public. It's not like the Irish situation where they were offering an alternative solution so could stand up for themselves on moral grounds whilst holding a straight face.

On balance, there may be a couple of tiny issues out there that get "blocked" but I don't think the really big boys will want to get involved with this one. There will be too many governments stacked up against them.

WShak

Certainly Dallara last night was saying that the CEO of various organisations holding the debt were keen to "do the right thing" for long term economic health rather than short term gain...I am not so sure. If I was a hedge fund manager who had taken a bet on Greece and felt that holding out might mess up the whole deal then surely I could also double down my position by shorting the Euro etc while holding out to try to collapse the whole deal.

John

<<<Certainly Dallara last night was saying that the CEO of various organisations holding the debt were keen to "do the right thing" for long term economic health rather than short term gain>>>



As Mandy Rice-Davies said "Well he would (say that) wouldn't he?"

:-)

If I was a hedge fund manager who had taken a bet on Greece and felt that holding out might mess up the whole deal then surely I could also double down my position by shorting the Euro etc while holding out to try to collapse the whole deal.

But you also have the knowledge that the EU is setting itself up to utterly shaft you if they possibly can. That you are perceived to be the enemy by a state which has made it quite clear that they are prepared to change laws to screw you over. It's kindof terrible from a market perspective but that's the reality. So it's not an easy decision to try and take them on.

But you also have the knowledge that the EU is setting itself up to utterly shaft you if they possibly can. That you are perceived to be the enemy by a state which has made it quite clear that they are prepared to change laws to screw you over. It's kindof terrible from a market perspective but that's the reality. So it's not an easy decision to try and take them on.

But I thought these guys had the big cahones to take just this sort of risk.

John

But I thought these guys had the big cahones to take just this sort of risk.

Yes and no. It's a probabilities game isn't it. So in order to win you have to be prepared to tie up capital for a considerable period and take on the EU. I think you'd need quite massive cahones to think you're going to win that. Surely a better trade would be to capitulate very easily and buy Euro's and equities before you do. Who knows is the problem.

B

Cahones don't really come into it. Buy at 39c in order to get, what, a double up in a few year's time and spend a fortune fighting the EU? There are better trades out there - I certainly wouldn't waste my time on this one since I think I could make far easier money elsewhere.

WShak

Just an anecdote to throw in the ring, but on CNBC this morning they had a clued-up sounding talking head saying that many/most of the private bond holders and the CDS owners *are* the same people / hedge funds.

He specifically called it a heads you win, tales you win, situation -- it was more a matter of how much they win.

No idea if he's right.

best
Flaneur

I wonder if he meant the basis ie cds vs bond arb - long bond and long protection and financing at libor.

<<<"But you also have the knowledge that the EU is setting itself up to utterly shaft you if they possibly can. That you are perceived to be the enemy by a state which has made it quite clear that they are prepared to change laws to screw you over. It's kindof terrible from a market perspective but that's the reality. So it's not an easy decision to try and take them on. ">>>
------------------------------------------

Indeed, lets hope the EU will be kinder to the rest of the world who wish to transgress the EU rules.


http://www.bbc.co.uk/news/business-17110268