Friday, January 6, 2012


You win some and you lose some.  Of course what went on in 430-429 B.C. was a little more serious that what will unfold over the weekend but the battle for Greece, c.2012 A.D. is proving to be an interesting one.  I suspect the results will not be so clear-cut this time around because there are no Persian hoard with which to contend and Greece will remain Greece despite the outcome, but will it be a Greece that is a member of the EU or something else entirely?

The big philosophical issue is pretty much agreed; Greece will achieve debt forgiveness.  The major items on the table are how much and what will the creditors get in return?  A short walk down memory lane might be helpful in understanding what's going on.

Back in the last century when everyone finally realized that there would be no growth in Latin America without debt relief, the issues were quite similar.  The only difference was that there was a fairly homogenous group of creditors composed almost entirely of banks with relatively equal concerns and equally subject to pressure from regulatory authorities which from the very beginning had been considerable.  The regulators had given the banks a fair amount of time to prepare for what all but the very dumb knew was going to be the end game and the pressure was all on the banks to "do a deal."  And do a deal they did, accepting a forgiveness of 35% of outstanding obligations in most cases and receiving collateral in the form of pledges of zero coupon bonds for that which was to be restructured.  If a bank didn't wish or could not accept a one-time loss, it's outstandings would be restructured with a very long maturity and a below-market interest rate.  There were other permutations in this menu of options for various debtors but the above was the basic deal.

The sittuation with Greece is somewhat different as the make-up of the creditors is different (primaily banks but a hodge-podge of others), the instruments are bonds as opposed to bank loans and the pressur-point is certainly more with the government of Greece than with the creditors.  However, what remains the same is the issues of how much do the creditors give up and what do they get in return and here's where it gets interesting.  The original thought was that there would be a 40% "hair cut" as the Euros like tosay.  That's out the window.  The argument is between a minimum of 50% and a maximum of 75%.  I suspect the Greeks will win out in this, but recognizing that there will be no "Brady Bonds" in this scenario, the creditors have come up with--or so I am led to believe--the requirements that any agreement is subject to English, as opposed to Greek Law and that the restructured debt will rank pari passu with all other debt of Greece now or in the future!   That means that there will be no preference for the ECB, the IMF or any other supernational institution.  To my knowledge, no sovereign has ever ascended to a demand such as this and certainly the IMF has never accepted such a position.  In this business, that would be a game changer.

There will be a battle on this to be sure and I wonder whether the creditors will be able to hold their position given the enormous pressue under which the Euro banks will find themselves.  The IMF will be and is dead set against it but one should keep in mind that a French woman runs the IMF and if there is one country in Europe that wants this deal done, it's France for their own reasons.  It is a facinating play that will begin in a day or so to wonks like me who have followed these and other goings on like this for decades.  I think there will be a compromise which in this business means the creditors will lose but the fear of the entire thing falling apart with the consequences of Greek retirement from the EU as they have threatened may encourage the creditors to stand firm.  Who wins in the end?  Perhaps we can look to history. Then again, I'm trying to figure out for whom to root.


...And now Carter,  read a bit more closely would you.  I have nothing against short sellers, I'm merely an observer of the human condition and the temptations of the flesh provided by the ability to participate in short selling.  And I did ask Massimo as per your request, and he said:

"Look Charlie, you tell this Pazzo I'ma no know what he's talking about.  In Italia, we do or we no do.  You find out on the end of the month.  We no need some smarta guy to come up with big words. Capische?"

I think you got him mad, Carter, then again I, perhaps like you, are still trying to figure out what Bank of America was thinking.  Then again, they've had a long relationship with Mediocredito...Then, let's not go there.

No comments:

Post a Comment