So. Many. Bailout questions

Discussion in 'Wall St. News' started by ASusilovic, Oct 30, 2011.

  1. A few, initial head-scratchers at pixel time.

    First, the Greek debt deal:

    1) Greece’s debt will remain 120 per cent of GDP a decade hence, even under the 50 per cent bondholder haircut. (As the debt sustainability analysis by the Troika warned.) Does that look like a safe number to you? Say, providing a good buffer to any external shocks that Greece might face over that period? Does it look like it rules out subsequent bondholder haircuts?

    2) The huge disparity between haircuts and actual debt reduction is a creature of Greece’s reliance on official loans (plus the ECB’s getting made whole on its Greek bond holdings). This deal will chuck another €100bn on the fire. Again, if a subsequent debt reduction is needed, we’re getting to the point of either completely wiping out bondholders, or official lenders have to write down.

    3) Official sources will also provide €30bn of credit enhancement to bondholders in the debt swap. We don’t know what this really boils down to, and probably won’t for some weeks. It might be that EFSF collateral attached to the restructured Greek debt is offered, purely because that’s how the first swap proposal worked (and, it appears, banks really wanted it again this time round). Of course there were proposals yesterday to give bondholders cash upfront. We strongly desire to know about other possible features that we just don’t know about so far, such as the legal status of the new bonds (would they be governed under English law?).

    4) How is Greece going to raise more money from privatisations? A further €15bn is targeted in the new agreement, but this is coming after the Troika already took a strange, fingers-in-ears-la-la-la approach to what is already acknowledged to be a difficult task of raising €50bn.

    Four points in, and hopefully you can see that a) very critical details remain to be decided, and b) the room for manoeuvre on Greek debt might actually be decreasing with this new offer. That is, a subsequent haircut might be harder to execute (even if debt levels are still high enough to argue that it should happen).

    5) Let’s get the inevitable Greek CDS question out of the way. What are the bondholders going to do, and what’s the ISDA determination committee going to determine? [Here are a couple of possibilities.] Assuming everyone agrees that the haircuts are sufficiently voluntary not to trigger a credit event — what does that mean for sovereign CDS? And indeed, for bond yields, as we pondered last week.

    What we really need is evidence of whether, or how, Greece might “punish” and bind bondholders who don’t take part in the swap — providing crucial evidence for the ISDA committee. This could be anything: a clear statement of intent to service the new bonds over unrestructured debt, exit consents by the participating bondholders which bind the holdouts in some way. Again, more detail is needed. Doubtless however, a few lawyers must be leafing through the ISDA definitions for credit events this morning…

    On to our second set of questions — the EFSF part of last night’s deal.

    6) Is China going to stump up for the EFSF SPV? Sarkozy is calling Hu Jintao at midday on Thursday to speak to him about this, and Klaus Regling, the head of the EFSF, is travelling to China on Friday. But even if China agrees, there could be some complications.

    7) How will the EFSF bond insurance plan pan out, particularly in terms of existing bondholders? Last night’s statement said that “providing credit enhancement to new debt” would be included. What form of enhancement in particular? The statement mentions investors can “purchase” insurance. This is very sketchy but this seems to exclude Spain or Italy buying collateral off the EFSF (a la Brady bonds) and handing them over to investors as a free gift with every bond issue. Rather, it sounds like investors buy credit protection. To put it all another way, it sounds like the EFSF sells protection (or “CDS”).

    8) How likely is it that we’ll see the level of fiscal integration alluded to in the agreement? A commitment to “consultation of the Commission and other euro area Member State before the adoption of any major fiscal or economic policy reform plans with potential spillover effects,” sounds like a big deal, and a sign of some determination to get at the root of the problem (or, one of them) by really deepening fiscal integration.

    Or, it could just be aspirational hot air.

    By Kate Mackenzie and Joseph Cotterill