WHAT A DAY!

Days actually. After all the fly over zone has suffered this year we received two of the most glorious days a person could imagine in yesterday and today. Simply perfect. It was so good I worked in the garden for 10 hours which I never do. Other than spraying Roundup instead of fungicide on one of trouble and striff's favorites, I did pretty good. Hopefully I washed it off in time.

Now as you know, I have nothing against a wink here and a nod there if it gets the job done but this thing the Frenchies have worked out along with the Germans goes beyond everything even I could have thought up although there are elements to it that I actually DID think up about 30-odd years ago, proving once again that, as I used to say to my troops, the only really new idea was the Sermon on the Mount...everything else is a variation on a theme. I also used to say that while everybody in a negotiation must give a little nobody should get screwed otherwise you'll never do another deal again with the same party. Let's see what is happening with Greece.

Remember my old fried, Bill Rhodes? When Bill left Citibank he, without passing GO, wound up at the Institute for International Finance run by Charlie Dalarra which is now chairing the Greek restructuring/refinancing/save the banks' butts meetings. Don't know whether Bill is still part of the show but Charlie is and whilst nominally owned by a whole mess of international institutions, the IIF is the play-toy of Josef Ackermann the head of DeutscheBank which may give you a clue in which direction these negotiations are headed.

As far as I know, here's the deal. The Greeks have already received a bundle from the IMF (Mme. Largade) and are supposed to agree to the following:

1. Pay the private creditors (banks) 30% of what is owed over the next 3 years
2. Allow the banks to refinance the remainder for 30 years in a Greek Bond
3. Take 30% of the proceeds and purchase a 30 year or so triple A zero coupon security through a special purpose facility which would be then be pledged to secure the 30 year bond.
4. Go away happy with the pledge of oodles of money from the EU, ECB or another collection of idiots.

The first time this was done was for a little consumer finance company in Mexico in 1987. The amount involved was U.S.$ 60,000,000. It worked beautifully (because I did it).

Before we talk about what might happen here, what we have before us is what the accountants like to call a novation...the substitution of one form of debt (the trible A zero) for another (Greek bonds). If you can do that the accountants will tell you that you can continue to carry the Greek bonds at par BECAUSE THEY WILL BE PAID AT MATURITY BY THE MATURING ZEROS. Clever, uh? I thought so. So did my bank clients who were mostly small U.S. banks who got out scott free from bad loans.

BUT for this to occur, you have to have one important element working for you: intersts rates. The imputed rate on the zero must be high enough so when added up par is reached with the maturity of the bond. In 1987, interest rates were in the 7-8% range for 30 year U.S. Treasury obligations. That is not true today. There is no zero imputed rate for a triple-A issuer that could possible get you to par in 30 years. From an accounting standpoint the deal is non-starter and a write-down of debt on the banks' books would have to be made. If we are playing by the rules that is. But of course we are not so I look forward to how they get around this small point.

What I am never going to understand is how in the hell the Greeks would agree to accept this piece of crap and why European taxpayers continue to put up with this kind of nonsense simply to save the jobs of a bunck of dumb bankers. Greece is never going to be able to service this stuff and such a scenario will doom the country in a few year's time. Save the EU? The Euro? May I ask for what, if the future which is virtually agreed by all parties at this time, is a future Greek default no matter what is done? And if Greece is so important to the future of Europe...well, dare I say that Europe may not be so important after all. Then again, China may come to the rescue. We can all hope for that somewhat portent-laden result while in the mean time S & P downgraded Portugal today. More tomorrow.