Tuesday, November 29, 2011


The grandkids rried to kill me again first through activity and then through the delivery of every childhood virus known to modern medicine.  But I beat them and here I am so let's get right down to it.

It's still All About Europe and during the Thanksgiving holiday a rather subtle yet important event was prertty much missed; the Greeks decided totake matters into their own hands and offered to settle with their foreign creditors for a "present value" of 25% on all outstanding term debt.  I haven't the slightest idea what the term "present value" means in this context and so far I haven't been able to get an adaquate explaination but for working purposes let's assume in means 25 cents on the dollar or Euro--take your pick.

Now say you, "What's the big deal?  There have been 'haircut' numbers floated around for months." Well, ses I this is the first time the Greeks have directly approached their creditors with an offer, bypassing the Euros, the Germans, the French, the ECB, the IMF and any other interlopers to the process.  What this means is the Greeks are prepared to negotiate by themselves a solution FOR themselves which if they hold to it is a game changer, or to put it another way the Greeks are now prepared to ignore the ramifications for the rest of the Euro zone--oh, they'll try to get to a deal that hurts the least--but at the end of the day it's Greece for the Greeks.

We shall see where tis thing goes in the coming weeks but I would like you to keep in mind a very important fact that up to this point everyone has missed.  A long time ago in a Galaxie far, far away, there used to be a clause that was standard at the end of every sovereign loan agreement: "This agreement shall be goverened by the laws of the State of New York (or England) and jurisdiction shall be with the courts of the State of New York (or the High Courts of England). "   If it came to it a lender knew what he was facing.  The sovereigns hated it but the sovereign rule applied: he who has the money makes the rules.  Then somewhere along the line (it started with the Brazilians if you're really interested), some idiot banker--whose name shall go unmentioned--in a burst of competitive zeal, agreed to include local law and it was not long before in the shift from bank loans to bond issues all references to New York and English law began to disappear.  I'll bet dollars to donuts that all of the Greek debt is goverened by Greek law and a good deal of it is subject to the jurisdiction of Greek courts which means the creditors have bubkus. A banker walking into a Greek courtroom to enforce the obligations will need combat pay.

So what has now come before us is what is know in the trade as an exchange offer in which the the Greeks propose to exchange all of their outstanding debt for new obligations worth---let us say--25 cents on the dollar or Euro.  I will also bet you dollars to donuts that a goodly amount of the outstanding debt has documentation that contains a clause that allows "substantive" changes to made in the docs provide a subtiantial number (80%?) of debt holders agree.  What is "substantive?"  Why the amount to be repaid would fit the definition just fine.  What the Greeks will do even whilst negotiating is to go out ant try to pick off individual creditors to agree to the terms (some will want out any any cost) and perhaps even employ firms to buy debt on the secondary market on their behalf and when either through direct negotiation or these private transactions the requisite percentage of agreement is reached, WHAMO!  Everybody is in.  Now if you believe that private agreements will not be reached, think again.  Further, in sovereign lending there is great leverage that a bank's regulator can exert--particularly in Europe as we have discussed.  Nevertheless, there will be real losses here and in the end, Mr. & Mrs. Taxpayer will take it in the neck again as they will protect their banks.

Now one can opt out of the deal and sue the Greeks but remember, the suit must be brought in Greek courts.  Good luck.  Furthermore, it is almost certain the the documentation of the exchange offer will contain a clause that require the offer be accepted by a certain date irrespective of any legal action in progress or else any creditors share will escheat--I think that's the word--to all the other creditors and one would then have to sue them to stop this from occuring or to recover any funds...also in Greek courts under Greek law.  Double good luck.  In agreeing to such terms, the lenders have cut themselves off from any aid from international institutions or depositary institutions holding Greek assets as any attempt for intersession will be met with a simple refusal to interfere, and rightfully so, with a voluntary contractual obligation.  It will not even constitute, arguably, a default, hence no insurance coverage.  Game, Set, Match.  Thanks for coming.  And oh, if you run into an international banker, be nice.  A suggestion?  Scratch them behind the ears.  They're like puppies, not bright but they love their ears scratched.

Anyway, there is one good thing to report this week.  Barney Frank has decided not to seek re-election.  The damage in which he participated we take us years from which to recover.  Next up in his position for his party is Maxine Waters, no less partisan, far more stupid and under investigation for unethical conduct.  Just wonderful.  But on the bright side, the Italian 3 and 10 year auction went wonderfully well today according to the pundits.  They paid around 8%.  I think I felt better when the grandkids were trying to kill me.

1 comment:

  1. Very nice insight in that 3rd paragraph, but isnt Greece like sooooo last spring?