Streetwise Professor

January 9, 2012

The Greek Can At the End of the Road?

Filed under: Derivatives,Economics,Financial Crisis II,Politics,Regulation — The Professor @ 12:13 pm

An adviser to German Finance Minister Wolfgang Schaeuble has told a Greek paper that the 50 percent haircut deal (PSI) is no longer operative:

The planned 50 percent writedown of Greek government bonds held by private creditors as part of a debt swap won’t be enough to make the country’s debt sustainable, an adviser to German Finance Minister Wolfgang Schaeuble told To Vima in an interview.

The write down, which aims to lower Greece’s debt to 120 percent of gross domestic product in 2020, will have to be greater and shouldn’t be voluntary, Oxford University professor Clemens Fuest told the Athens-based newspaper.

I’ve just seen on Twitter a 60 percent number being batted around–no link as of yet.

In addition to the scuppering of the 50 percent “deal” agreed to in October, the significant part of this statement is that the haircut shouldn’t be voluntary.  This suggests that governments are tiring of the negotiations, and believe that immediate action is necessary.  Indeed, given the horror with which Euro officialdom had previously contemplated the possibility of an involuntary haircut of this magnitude–which would trigger CDS, if ISDA wants to maintain a shred of credibility–this drip-drip-drip of leaks indicates that said officialdom recognizes that the can has arrived at the end of the road.

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  1. SWP, what are your thoughts on what is happening in Hungary? (more politically than financially, but the latter is interesting too).

    Will we have a post from you on that?

    Comment by Sublime Oblivion — January 9, 2012 @ 3:47 pm

  2. Why does anyone think 60% is enough?

    Comment by Jim — January 9, 2012 @ 7:22 pm

  3. @Jim–Nobody does, especially b/c that 60 pct applies only to privately held debt, and not that held by the ECB, IMF, etc. I think this is part of the if-we-swallow-them-slowly-enough-they-won’t-notice strategy. Like I said on an earlier post, this will likely end with the Germans demanding the bondholders pay the Greeks.

    @S/O–bandwidth constraints have prevented me from paying close attention to Hungary. I know the basics, but not enough to comment in detail. If I have a chance, I’ll give it a closer look and weigh in. Thanks for the suggestion.

    The ProfessorComment by The Professor — January 9, 2012 @ 9:30 pm

  4. Apparently, the IMF is heading back to Athens next week to re-new those oh-so-cultivated chat sessions re who gets what. It occurs to me the supra-national folks (IMF, ECB, BIS) could unilaterally impose their desired solution by solving the haircut question backwards: How much funding do they have to provide to cover the supra-nationals’ haircut goals? Then bondholders and banks are left to determine whether they will take the implicit haircut required to avoid triggering CDS payments. This is something of a closed-form solution to the issue.

    This approach can be generalized to any peripheral bond exposure now and in the future, and actually could look a lot like supra-national monetary policy.

    This all starts to look like a game of Texas hold ’em. Everyone can see the cards that are turned up on the table; the only question left is to see who’s willing to call whose bluff. Since the actual exposures of the banks are totally opaque — apparently even to these supra-national funder-regulators — this is the only way to force a resolution of the joint debt-CDS conundrum. (The game-theory of it all boggles the mind, particularly vis-a-vis the CDS cascades.)

    The supra-nationals could then pull a page from the Fed’s monetary-policy playbook and continue to provide zero-cost funding at the short end of the curve using their closed-form decision rule, which the banks can use to purchase notes and bonds issued by the crippled Euro sovereigns at the longer end of the curve. This way the sov debt doesn’t blow up, and the banks get to re-cap over a decent interval.

    In the meantime the sovs can work on re-tooling their economies to become more competitive — either lower wages, reduce state-funded benefits (like retirement in your early 50s), and increase output (so that GDPs go up), or, failing that, lower wages, reduce state-funded benefits (like retirement in your early 50s), and increase output (so that GDPs go up). There’s no way out of that one.

    This’ll be difficult, because the banks that are being kept alive by this Fed-like maneuver won’t be doing a lot of lending. That means the private sector in these crippled economies will be left, pretty much, to their own devices to re-tool and become competitive. Not unlike the U.S. experience over the past 4 years.

    Comment by markets.aurelius — January 10, 2012 @ 6:22 am

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