"The total official financing will amount to an estimated 109 billion euro. This programme will be designed, notably through lower interest rates and extended maturities, to decisively improve the debt sustainability and refinancing profile of Greece."
Markets and especially the financial sector like banks (especially French banks) owning debt from Greece (or CDO) have positively reacted to the announce for a different reason that the one shown in the press IMHO. The major risk for the banks is the inability from a customer to pay their debt. With the current proposal the risk is again moved to the public sector where they will take the part of the debt that Greece cannot pay or pay with difficulties.
So for the banks, it's a great move as their current contribution is just a small part from their revenue removed of the interest rate on the debt while lowering down the risks of unpaid debt.
Without forgetting that the ECB is feeding the banks with a preferential rate (around 1%) for credit given to other countries by the banks with a higher rate (around 3-4%).
So the winner is clearly the financial sector. We removed the risks for you and States will cover by public financing. It's just like the "refinancing" for CDO in 2008...
Absolutely. Indeed risk is not even just about the "customer's" (in this case, the nation of Greece) inability to pay, but also counterparty risk. It's not just Deutschebank that's on the hook for defaulted Greek debt, but every counterparty who wrote them credit default swaps (CDS) on that debt. That's what triggered the financial crisis in 2008 - as Bear Stearns' and Lehman Brothers' cash flow from their debt holdings dried up, redemption calls for their CDS metastasized though the financial system.
If anyone is wondering why the core Euro-area (not to mention the US government) is so concerned about Greek (and Irish and Portuguese and Spanish and Italian) debt, it's less about some abstract political commitment to EU unity than it is the simple fact that a true default will destroy the European banking system.
Throwing cheap cash at the problem will work until the day that it suddenly doesn't. While the proximate cause to the original financial crisis was cash flow, that is not the ultimate cause for these problems. The problem is that risk in the financial system is (still!) extremely opaque, and it is not so much that banks are illiquid as there is almost no circumstance in which they could procure enough cash to meet calls on their outstanding CDS in the event of some "unexpected" event like subprime mortages or Greece going into default.
The US government learned the hard way what would happen if they allowed one of these overlevered banks to go under as they did with Lehman Brothers in 2008. On the other hand, national governments do not have enough capital to possibly cover the total liabilities in the financial system, nor can they even predict when and where that capital might be needed.
As with many things in life, there is no real good solution to this, and there is still lots of pain ahead.
There is a good solution, namely this, transparency. Just like the law requires manufacturers of food to label what goes into the box, so sellers of aggregated derivatives should label what goes into their CDOs, CDSs, etc. This would enable to buyer to have half a chance at assessing the risk attached. Seller won't do this however until they are forced to do it because they don't want to say what is in the secret sauce. The only reason I can fathom that someone would want to buy a "mystery gift" derivative is greed.
As Warren Buffet says, "I hold my nose and point towards Wall Street."
But the contents of each CDO and CDS was/is completely transparent to the buyer and seller. Maybe the buyers were less sophisticated than the sellers, but that's really too convenient an excuse. The whole CDO construction process was openly called 'Ratings Arbitrage' after all.
I agree that things should be transparent : And so the right thing to do is to force all CDS to clear vs. a central counterparty, with publicly known mark-to-market pricing. Similarly, banks should be required to mark-to-market on an arms-length basis. But somehow this legislation never gets passed...
The real story is that this problem has been kicked into the weeds. Greece is still fundamentally over spending; it has been spared some momentary pain, but there is far more to come. My gut feel is that it will take the larger part of 30 years for Greece to right itself unless Germany and France find some way to "pay" Greece its "dues" for keeping the Euro "artificially" low and bolstering Northern European exports to the rest of the world.
You're right of course. However, in covering the crisis people have often referred to a rough north/south divide among Euro countries. I think he was referring to big "northern" exporters like Germany and France, vs "southern" Mediterranean countries like Greece, Spain, and Portugal.
FYI there is no such thing as a "kind of" or "selective" default. It's binary. You either pay back creditors what they are owed or you dont. It's rare that a company or country defaults on ALL obligations all at once. As a member of Wall Street, I appreciate the WSJ's noble attempt to sugar coat this (article below) but that doesnt change the facts.
Ditto watchandwait below.., glad it finally happened.
Wait a gosh-darn-second - if the situation is either definite default OR not-a-default, then Greece has NOT defaulted.
From the article: if you’re a holder of Greek bonds right now, you have three choices... 1. You can do nothing, and hope that Greece pays you in full and on time. (and other stuff)... The first option is by far the most interesting. No one has come out and said that Greece is going to default on bondholders who don’t exchange their bonds;
IE, the aim is to threaten and arm-twisted big banks into exchanging their bonds without any formal default happening. If we're going by a "gold standard", when Greece actually misses a payment on its bonds, then it will have defaulted. Until then, this is negotiation.
Further from the article: "Is it possible for other bondholders — those who haven’t had their arms twisted — to free-ride on the back of this deal and continue to get paid in full? I suspect that it probably is. Which is one reason why this Greek restructuring won’t be the last."
Again, nothing has happen to the non-big-bank holders. Indeed, they get a convenient free-ride.
The ratings agencies have said that arm-twisting bondholders to accept new bonds with less favourable conditions amounts to a default.
I promise to pay you $100 tomorrow. I then tell you you'll get your money in 30 years and at a much lower interest rate. That's breaking the original promise, even though I haven't actually 'not paid you back'.
I don't think it's a default in that example until tomorrow comes and I fail to hand over the $100. Until then we're just negotiating and speculating about whether I will or won't hand it over.
i think this is a situation where words are kind of hiding what really matters. what people care about when it comes to 'default' is how this effects the debtors ability to pay in the future and renegotiating debt is a sign that someone may be less able to pay in the future compared to someone that continues to make payments normally.
Again, you can call X "effective default" or say X "amounts to default" all you want and I wouldn't argue with your definition. But since the OP called default an absolute binary, then if we want that, we have to wait till we have literal default. IE, what I tell you doesn't matter, we have to wait till it is tomorrow and I haven't paid.
The point is that in an "effective default", there's no violation of any explicit contract however much the loaning parties may have lost confidence. IE, if Greece was home-owner renegotiating its mortgage, there is no point where the bank can go to court and demand the house (though against sovereign nation, banks, of course, have no such recourse but its considered important, I believe).
Sure. I was saying that the important point is that the _ratings agencies_ call it a default. Your and my (and the OP's) definition isn't important. If they think it's a default then for a percentage of the world (who need ratings agencies' support), it's binary-on.
A way to describe what is happens is that the EU says "we know some people are worried about the money Greece owns them. For them, we offer insurance. We have several pricing schemes for that assurance:..."
Phrasing it that way would IMO put some spin on it, but it would not be a bland lie, either.
I think they stroke a good balance here. It is not arm-wrestling, but they likely will reach the intended goals (decrease immediate pressure on Greece, and show the world that the EU will help countries in trouble)
You don't have to except the deal, the only reason to do so is fear that they bail out on you later. So I'd say that if it's binary, this is not a default.
"the aim is to threaten and arm-twisted big banks into exchanging their bonds"
You're basically saying that Greece renegotiated some of it's debt obligations. Which is a default.
"Sovereign defaults
Sovereign borrowers such as nation-states generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences. One example is with North Korea, which in 1987 defaulted on some of its loans. In such cases, the defaulting country and the creditor are more likely to renegotiate the interest rate, length of the loan, or the principal payments."
Maybe it would've been nicer if we just said "deep shit" instead of "default." When you owe the bank a million dollars, the bank owns you, but when you owe the bank a trillion dollars, you own the bank.
Greece knows that there are lots of important people who are overexposed. It knows that if it does the wrong thing, it could trigger a run on its creditors that is akin to what happened to Lehman. It doesn't want to be the bad guy necessarily, who does? But its finances are untenable.
The question you have to ask yourself is “What does it mean?” Will readers understand what “Greece Defaults” entails? If not, then it’s the journalists job to write something else.
A semantic argument won’t help you there. If it were my job to write articles about the situation I certainly wouldn’t pick “Greece Defaults” as a headline. I would mention the default in the body and explain what that actually means. Context. Not all defaults are created equal. And that’s actually kinda sorta important.
It just means that instead of having the train quickly derail, they're going to stretch it out like it were a Hollywood movie. Seriously. No one believes that debt is going to be repaid. The politicos are just praying that the train doesn't hit the ground on their watch. If you read the text of this, it just "says" they're going to extend all the terms.
But we all know the truth. Shit is going to happen. If for no reason other than that the Greek government is going to stop working because it can't fund itself.
[Edit: What diff does it make if they're going to practically indefinitely extend the terms? And at those rates? That's like hoping that inflation will make the debt go away. Except Greece is in the Eurozone so that's not quite going to happen.]
Wrong. The way it appears now, the debt is going to be repaid over a longer period of time. Your confusion about this indicates that writers are not doing a good job explaining this to people.
Even if it does get repaid over a longer period, this more or less means those bonds are shot as an investment. Moreover, this means that no one is going to lend the Greek gov't any more money. I didn't see any terms in the agreement where they said they'd be lending the Greeks more money. That means the government is going to stop working. Or Greece will exit the Eurozone. The Greek gov't could of course cut all the way back, but that means a depression, which also means the money won't be paid back.
That remains to be seen; they aren't going to access the global credit market for at least few years anyway because they have too much debt to begin with.
But the existing bonds still have value and they'll still be held as investments. It's not like the whole country has collapsed and the value of its debt is worthless. A haircut is just that, a downward adjustment in the value of the debt.
It's inane to think that Greece will exit the Euro zone because of this. The Euro zone is the only thing keeping them going at this point.
You mean they're promising to repay it over a longer period of time, the same way they originally promised to pay it over a shorter period of time. The odds that they'll actually pay the debt over any time frame are very small and everyone knows it.
I think that the point that baguasquirrel is making is that if Greece cannot pay their debts now, how confident should anyone be that they'll be able to pay the debts years down the road? It would appear that the larger day of reckoning is being postponed.
It's not written anywhere that they won't pay upon the agreed schedule.
Debtors have "an option" to gain additional guarantees at an additional cost. For debtors that don't enter into such additional contracts, Greece made all the payments up to date.
So you're making a semantic argument, which is, you know, great, but surely there's a difference between the relatively modest haircut that's going on here and the kind of classical default in which little or none of the debt gets repaid?
The author of the piece writes as if Greece is getting off scot-free here. Is not aware of the manner in which mobs have been rioting there for the past month? This is not a pleasant situation for anybody.
As far as I can see in other reporting, it's something of the order of a 20% write down (at least for the German Banks) with the EU buying up some of the bonds and the terms being extended to 15 and 30 years. In other words, it is not clear that how this is a default. In fact The Guardian says:
German government sources said they had received assurances from the international ratings agencies that they would not rush to judgment in declaring a Greek default but would take their time in studying the deal.
Which implies to me that "default" is in the eye of the beholder.
Finance is not my kink, but my understanding is the nature of the "write down" is generally that as a bank you cannot borrow against the money that is owed to you, rather than actually giving up on collecting it entirely.
In other words, the OP headline sees a bit dramatic.
The headline isn't dramatic. Credit rating agencies likely will consider this a default. The article explains it pretty plainly:
But that won't stop the credit rating agencies giving Greece's bonds a default rating — this is a coercive deal, which clearly reduces the value of banks' Greek debt. (After all, just look at those haircuts.)
A default is when you fail to fulfill your obligations. If I owe you $1.00, but instead pay you $0.80 (1 year late)...I didn't fulfill my obligation to you, and it's fair to consider me a credit risk.
Or, put another way, people who declare personal bankruptcy don't do so because they can't pay _any_ of their debt, they do so because they can't pay _all_ of it.
But that's not what's happening at this moment. If you choose to do nothing, you still keep your $1.00 debt. Until now, Greece didn't miss a single payment. It's not making it mandatory to accept the 20% cut. It's not downgrading any promise for holders that choose to do nothing. Nor did it fail to pay its matured debt until now.
It's just offering additional guarantees (which were not present in the initial debt agreement) at a specific cost (a 20% cut or a longer maturity date) for those that want to enter willingly into such transactions.
Debt rating describes a borrower's creditworthiness at a particular moment in time. Since Greece won't have access to the world credit markets for some time, their credit rating today is not material. What is at issue here is how quickly their credit rating recovers.
I think the ECB was extremely careful in the crafting of this deal to do everything possible to NOT trigger a technical default. A default is a delay or missing any coupon (interest) payments or failing to pay back a bond upon it's redemption date.
The reason why it is so important that Greece not default is that a huge amount of hedge funds and other speculative investors have purchased CDS guaranteeing Greek bonds will not default. Because the CDS market is completely unregulated, we don't know how many billions or hundreds of billions in bets have been placed on a Greek default. In fact, even people that don't even own Greek bonds could purchase a CDS guaranteeing a payout if Greece defaults.
In other words, if Greece does legally default by delaying any coupon payments or failing to pay any creditors, the ripples caused by all of the highly leveraged CDS could create another Lehman like scenario where large US and foreign banks don't have the capital reserves to cover all of the bets.
The real crime in all of this is that the CDS market is still completely unregulated and the hedge funds are legally allowed to bet on this. The real world equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house, hoping to spark a flame. The hedge funds do this every day by taking out CDS and then proceeding to short Greek bonds. If they can panic enough investors into running for the exits, they can trigger a default and become rich.
> equivalent would be that you're allowed to take out a fire insurance policy on your neighbors house, and then proceed to smoke cigarettes and flick the lit butts at his house
Yes, hedge funds (and everyone) are allowed to bet on this. If there's an issue here, the question is who is selling fire insurance policies (at non-exorbitant rates) when they know that arsonists are around? If it's European banks that know they'll be bailed out, that's a problem.
In theory, all CDS trades are registered with DTCC since 2009, and my understanding is this works pretty well for contracts as standardized and liquid as Greece. See also the WSJ article linked by ristretto below.
An interesting angle along those lines is: given the mostly unregulated nature of the CDS market, do they even all have the same conditions for "default"? Is it possible that some CDS contracts are worded more liberally than others?
Yes, though the ISDA docs have standardized most of it.
But there are also a couple of major types of contract. (a) if there's a Credit Event, the protection seller pays 100 for the distressed debt (essentially taking a loss equal to however much the value of the debt fell). (b) if there's a Credit Event, the protection seller pays EUR40 (fixed payout, with a specific 60% recovery assumption).
By playing on the mix of these CDS, people are probably already be playing on the post default value of Greek Debt, even before anything has formally happened. My guess is that process started over a year ago.
The important piece of this is that something has had an 'Event of Default' : That will cause all the Credit Default Swaps (CDS) written against Greek debt to trigger.
Banks (mostly European banks, as I understand it) that held Greek debt, but insured it using CDS (written mostly by US banks, ditto), will be able to hand the problem to their counterparties, in exchange for 100%.
There may be some very interesting consequences about to unfold...
I would argue that there is such a thing as “kind of” default. Consider a couple of scenarios and think about whether it’s a default in a “common sense” sense, whether a ratings agency would/should consider it a default or selective default, and whether it would/should be treated as a default under CDS contracts:
1) Debtor simply stops paying interest or principal.
2) Debtor makes a voluntary exchange offer, offering new debt that is generally considered to offer _better_ terms (e.g. higher interest rate but longer maturity). 90% of creditors accept.
3) Debtor makes a voluntary exchange offer, offering new debt that is generally considered to offer _worse_ terms (e.g. same interest rate but longer maturity). 80% of creditors accept, perhaps because they think it’s better than an actual default later.
4) The debt contract has a collective action cause saying that if 2/3 of creditors accept, an exchange offer is binding on everyone. 2/3 of creditors accept an exchange offer that offers worse terms.
5) Debtor makes a voluntary exchange offer. The central bank announces that a month after the exchange offer replies are due, it will stop accepting the old debt as collateral for loans by the central bank and will only accept the new debt as collateral.
Would you say that all of these are default and there are no gray areas?
Isn't the whole "default / no default" situation about whether the CDS mechanism will be triggered or not? On the other hand, S&P is the only rating agency with a "selective default" grade. Other rating agencies only have "default".
Seeing the title "Greece defaults" made me things had taken a turn for the worse compared to news I'd heard earlier in the day, but no, this is just the title of an opinion piece. Other news articles are more nuanced, and in particular, the Wall Street Journal asks "What Constitutes a Greek Default? And Who Decides?": http://online.wsj.com/article/SB1000142405311190346110457645...
The WSJ's article is like all "I have a friend who thinks she might be a teensey weeensey little bit pregnant...".
Tomorrow, the markets make an example out of Greece in order to send a message to the US. But they'd better watch out, it could backfire. Congress now has a taste of the thrill of writing a (raise pinky) one trillion dollar check. If another AIG starts to look shaky...
I've gone through the News channel in topchan.tv, which has multiple sources. Out of 180 of news clips for today, only four are related to the Greek bailout. AlJazeera has more details and it mentioned partial default, in the sense that the lenders would take a loss.
The EU sort of rescued Greece, now Greece sort of defaults. Portugal, Spain, and Italy are not that far behind. The biggest problem, aside from Greece's fiscal mess, is that Germany can't muster up enough political support to clean up after their mess more decisively despite the fact that they are now in the same monetary union. The catch 22 of these financial crises is that inaction will result in financial meltdown, decisive rescues political suicide.
Delayed action though leads to speculation and uncertainty as was shown in the past few weeks. Nothing changed in the Italian economic policy since friday last week, but monday and tuesday brought deep losses and the Italian BTP bonds reached the highest spread against the Bund in recent history. Today, 3 days later, Italy is back to a less crazy spread (still pretty high) and _nothing_ changed in its policy, 100 base points less over 300 in 3 days is pretty crazy.
The problem is not an economic problem but a political one. The cost of Greece bailout is a rounding error in Europe's total budget, the test ahead is about how the EU can start unifying the economic policy and grow more cohesively.
Lots of countries gave up monetary control power but without a unifying economic government body it's absolutely impossible for the weakest links to survive with all their issues without some help.
Lack of real unification is the problem, not economy per se. I think this is your point somewhat, am I right?
Thanks for the help. As you say, original detractors emphasized that Greece was at most a little over 2% of the EU economy but we've all seen how one bad apple can take down the whole barrel. Perhaps they need a stronger ECB. DSK was doing a commendable job holding it together until he got stopped in NY.
There are benefits to delayed actions..it helps people/banks/countries prepare for when unpleasant actions are required. In this specific case, it seems (from reading) that they are trying to buy time to make sure Spanish banks can mean newly set (and much needed) capital requirements.
I read at a financial analysis, that Italy experienced the most massive capital escape of it's recent history, so it is not that _nothing_ has happened, only probably it happened "behind scenes".
I agree that the core problem is the lack of economic unification.
If only it were that simple. It probably won't only be the Germans who end up footing the bill for this. As I understand it, German banks bought Credit Default Swaps on these loans, so there's no telling who will ultimately end up footing the bill.
do you know where much of the money from Greece has gone all this years? Weapons developed by Germany, and German industrial products bought with loans by Greeks, like cars, cranes and bulldozers.
Do you know witch country benefits from a weak euro so the can export a lot?
Germany has basically subsidized its formerly East-German states for 20 years now. Very much comparible in my opinion. After reunification, most East-German companies were not competitive (in large part due to the 1:1 exchange rate between East-Mark and DMark which was chosen for political reasons) and they never really catched up. But for West-German companies, it's a nice market to sell their products.
The real problem is that there are or will be efforts by the EU to persuade e.g. Greece to heighten the retirement age, or Ireland to increase corporate taxes -- without proper democratic legitimization. That's scary.
From the info box on this story in the print edition of the WSJ article this morning:
---
Q:There has been concern about a "credit event" that could trigger payouts on credit default swaps, a type of insurance against default. Will this happen?
A: Probably not. The deal for private-sector contributions is voluntary. If a deal doesn't bind all bondholders, it's unlikely to be considered a credit event.
Q:What use is default insurance if there's a default and no payouts?
A: Good question. It may lead to some soul-searching in the CDS market.
---
So the financial instruments designed to insure against default are being bypassed by deliberately circuitous arrangements and language, to the point that people are wondering what they are even for anymore? That sure seems like strong evidence in favor of the OP's position.
As I understand it you default on a loan, you don't default as an entity. So it's doesn't really make sense to talk about Greece defaulting without saying which loans they defaulted on. Hence the "kind of"/"selective" etc.
I read this as Greece defaulted on kind of all it's loans, so defaulted on some and not on others. The others may have been renegotiations, longer terms etc.
Apparently investors were fond of thinking that Greek debt was as safe as any in EU because it was backed by the Germans.
This seems not unlike the belief that Fannie Mae/Freddie Mac were effectively backed by the US Treasury. In the the US scenario these investor beliefs have been upheld by bailouts.
But in the Greek situation, this bet was just now shown to be wrong. The open question is just how big of a house of cards has been built upon this assumption.
Tomorrow is going to be a busy day for a lot of people.
Typically (for a company at least), debt has 'cross-default' provisions in it. So that failure to pay any particular creditor causes legal triggers to trip on every piece of debt. This is prevent the company persecuting particular sets of holders, and makes it a huge incentive not to miss payments to anyone.
The problem with the arm-twisting idea is that it only requires one hold-out, and everyone gets pulled through the default process.
Right, I didn't realise that mechanism existed, thanks for the heads up. It makes sense, removing the opportunity for slippery dealings with preferential treatment of some debt over the rest.
Finally the only right move to do. If you look at greece's huge debt, it was clear that - even in booming economic times - they could have never managed to pay it all back.
Yes the greece default rating, will bring some pressure to the (mostly europrean) banks, but I'm sure the world will not stop moving, it might actually be the first step out of the euro crisis.
You've got it exactly backwards: media hyperinflates things to sell and get people to watch. Our "great depression" as you call it right now is nothing like what happened in the 30s. Comparisons just serve to fear monger.
But Chailatte is right, the hyperbole goes in the direction it's needed. Greece has defaulted. It's either principal with interest, or it's a default. The reason for the wishy-washy phrasing is to avoid insurance claims.
Also, we're in a Depression (although not the Great Depression) and the media never uses that term (and then happily declares the "recession" to be over) to avoid self-fulfilling prophesy behavior. But make no mistake, we're in a depression and the media swings its hyperbole in the direction it's needed.
Nearly off topic, but all these debt issues make me think that this is why "world level" currency like bitcoin can be interesting. If it starts to spread enough to reach a critical mass over several economies, this kind of electronic currency can be the only currency disconnected from a single economy. The value of such currency would be function of the volume shared in each economy using it, where economy would be the US, EU, Japan, China etc.
You could say, a bit like gold, but easier to pay with.
Note that I am not saying I endorse bitcoin or any kind of crypto currency and recommend you to exchange your Euros/Dollars for some. For me, it is too speculative at the moment. This is just the concept which I find interesting.
Saying the entity "EU" is a single economy but the entity "US and China" isn't seems rather arbitrary to me. At the very least, euro is already a currency disconnected from a single economy, being currently connected to at least two: the relatively sane part of eurozone, and PI(B)IGS.
This is terrifying. The possibilities of a double-dip recession turn depression are growing by the day. Excuse me while I start working out, learn how to use a shot-gun and develop a taste for cider while deepening my voice.
There are several different degrees of default, and ratings agencies take into account the severity of possible or past defaults in assigning credit ratings. For instance, Standard & Poor's has the following distinction [1]:
> An obligor rated 'SD' (selective default) or 'D' has failed to pay one or more of its financial obligations (rated or unrated) when it came due. A 'D' rating is assigned when Standard & Poor's believes that the default will be a general default and that the obligor will fail to pay all or substantially all of its obligations as they come due. An 'SD' rating is assigned when Standard & Poor's believes that the obligor has selectively defaulted on a specific issue or class of obligations, excluding those that qualify as regulatory capital, but it will continue to meet its payment obligations on other issues or classes of obligations in a timely manner. A selective default includes the completion of a distressed exchange offer, whereby one or more financial obligation is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
According to this definition, Greece is SD, and S&P has rated this credit event so.
Felix Salmon is very much a "default is default, even if it means making a coupon payment one day late" kind of person: he is not using weasel words here.
Whether they defaulted or not is actually quite key. You see, all the CDS (Credit default swap) holders get to demand the full face value of the Greek debt they hold from the CDS seller if Greece has defaulted. The CDS writers are going to take a huge bath if this happens. This is what took down AIG, except in that case it was subprime MBS (Mortgage backed securities) CDSs that did it.
what constitutes default will be pretty clearly defined in the contract - which is more in terms of credit "events" rather than just default. See for example the ISDA definitions: http://credit-deriv.com/isdadefinitions.htm
This is an excellent question--I'm also curious to see how CDSes are affected. Logic dictates the EU would structure this bailout so that, no, CDSes cannot be redeemed, lest we see a bunch of insurers go under as well.
You can bet there are a lot of people making phone calls right now trying to figure this out. My guess is that nobody knows at this point.
If this so-called "selective default" does end up being "structured" such that markets are surprised when CDSs cannot actually be invoked, then that erosion of confidence in the system itself might end up fueling a cascade failure even worse than simple direct failure of some insurers.
If I were worried about this point (and a holder of a lot on CDS 'insured' bonds), I'd get a friend that was immune to 'arm twisting' to buy 1MM of a particular issue, and play extremely hardball with the ECB. Eventually, a payment would not occur, and there would be a solid 'Credit Event' to trigger all the CDS.
NYT: "Holders of short-term obligations would be able to swap their notes for debt with longer maturities and backed by high-rated bonds. An organization that includes most major European banks said its members would accept the offer and expected 90 percent of all Greek bonds to be exchanged. [...] financial institutions that own Greek bonds would effectively contribute 54 billion euros through 2014, largely by accepting reduced interest payments, and will stretch their maturities to as long as 30 years."
I don't understand. Are 90% of Greek bonds truly held by organizations susceptible to arm-twisting by the ECB to the tune of 54 gigaeuros?
How long is that charity coalition going to hold together once they see others collecting on their CDS policies?
My guess is that something more than 10% those Greek bonds are held by entities which, in reality, are for-profit corporations with shareholders that know how to do a little arm-twisting of their own.
If you're a huge national pension fund that holds both Greek debt AND, say, a lot more Spanish debt, it's in your interest to exchange (and prevent contagion) even if other holders are making out better by not exchanging. If everyone refuses to exchange, Greece defaults and you could see contagion that impacts the rest of your portfolio. Most major holders have probably already written down the value of any Greek bonds anyway.
I believe that's true of the large private banks also, which is part of why this group amounting to 90% is on board. It's in the rational self-interest of a bank like Deutsche Bank or Societe Generale to take a haircut on their Greek-debt portfolio if it keeps the rest of their EU bond portfolio from blowing up--- especially if they can get a deal like this one where the EU governments partially reimburse the haircut.
OK, but what if you were using these Greek notes as collateral? Suddenly they're downgraded and you on the phone with your lenders. Are your lenders on board with this plan? They have reporting requirements too, it seems like you might be under an obligation to invoke your CDS policy if at all possible.
After all, why would the world spend $B on CDSs and then not invoke them when it came down to it?
Unless the notes were a large portion of your portfolio, it's not a problem. Given the relative size of Greece to the rest of the EU, unless you were running the "Greek Debt Investment Fund" you're still probably better off helping to prevent contagion and your lenders are too.
But... If I'm a hedge fund, why even own Greek debt plus the insurance? Just buy the insurance, and burn Greece. I'd also be buying (CDS) on other tipping-point countries, and watching the knock-on effect.
Ah : But that demonstrates how terrible CDS is, and how amoral hedge funds are. Actually (IMHO) the fact that Greek CDS was so cheap to buy was just an indication of how little trust people have that politicians respect the law in European countries. It would have been far cheaper to have sorted through this mess on day one, rather than spending taxpayer funds giving Greeks a lifeline when the changes that they have to make were always inevitable.
And now the politicians words have been demonstrated to be completely worthless, there'll be a lot more pain - in countries where it might otherwise have been unnecessary.
Why is buying unhedged CDS an amoral act? Is shorting a stock amoral? You shouldn't have to own a security to buy the default insurance on it, any more than you should have to buy a stock to own puts on it. It's a contract between two educated and willing counterparties.
A bank might be short Greek debt because of other trading positions, and want to sell Greek CDS to balance that position. Restricting who can buy that security hinders it being priced right.
I actually stated the opposite : People might use this as an example of how amoral hedgefunds are, but it turns out that they are just more clearsighted. Ditto shorting, HFT, etc.
But... If I'm a hedge fund, why even own Greek debt plus the insurance?
CDSes are generally used to hedge a position. If a hedge fund holds both Greek bonds and CDSes on those bonds, they come out ahead regardless of what happens to Greece.
Only if buying the insurance was cheaper than the carry from owning the bonds. There's no reason that this should be a 'free lunch'. Indeed, CDS, the bonds, and the market for short-selling the bonds, form a no-arbitrage kind of thing : So that no one makes money without risk.
Does anyone know where I can get more in-depth analysis of the debt soverign crisis ?
I am quite interested in the topic but most articles are just fluff in terms of deep economic analysis
everybody is concentrating about the loans, but there was nothing being said on the lack of social contract in Greece. sure, they get some more loans/time, but the fact remains that the greek dont seem to want to pay their taxes.
There's nothing irrational about wondering how deep the iceberg goes.
I'm always amused when people blaim the market for pointing out failed assets, as if the process of price discovery itself is more responsible for intrinsic value than the nature of the asset itself.
Totally agreed. Markets moved up, but a decline of the various indices would be justified: Greece will need another bailout, as this "partial default" only deals with a little over half of Greece's outstanding debt. They still have 140 million Euros to go.
What I can still not understand: how could this have happened at all and how come just like with the financial crisis following the housing bubble, it is nobody's fault really, nobody gets the blame and has to answer and step down and get locked up for it... and ultimately banks or the countries just get their bail-out and that's it. Few months from now life will just continue as usual as if nothing ever happened, just like it did on Wall Street. They went right back at it.
The funniest thing, a few weeks ago it was a very popular opinion in the media in Greece (even in respectable papers) that Germany should absolutely have to pay since they got allegedly SOOO rich and happy on all those imports Greece bought from Germany. Which in reality were an absolutely ridiculous amount of like 1 or 2% of all of Greece's imports but it shows how quickly a scape goat was conjured up in the media to direct people's attention and hate away from their own politicians.
Seriously, how can you not blame the politicians in that country and blame whoever was responsible for accepting Greece into the monetary union in the first place when they downright faked their economic statistics and obviously noone did any due-diligence?
There is a constant decline in voters and a general sense of "disenchantment with politics" here; people just care less and less and I can really see why... it doesn't really matter who you vote for anyway, they all get away with whatever they want and the biggest crises of the last 10, 20, 30 years just get brushed off like nothing happened. Insane amounts of bailouts are paid out on the backs of the working citizens and then that's it. It is never anybody's fault so certainly this does not scare off ANYONE to refrain from careless, negligent conduct.
I am not trying to troll, I just really honestly do not understand it... in my own understanding by all that is right, a few people who were actually responsible or in charge and did not do anything to prevent it should be hanging from trees or burning on stakes by now, figuratively speaking (but I would not mind having it literally).
In any company a CEO conducting business like these countries are doing on a daily basis would have been locked up a hundred times over looong time ago for a multitude of very grave misconducts, evasion, falsification of accounts etc etc etc.
When you rob a bank for petty cash, you get locked up; when you "steal a movie" you get locked up even longer. When you frakk over the whole world or the whole EU, then most everyone was joining in anyway so "shit happens", "tough luck", let's write a check and shake hands for the media.
Can someone with more political understanding than I have put all this clusterfuck-shitstorm into perspective for me, please?
> Can someone with more political understanding than I have put all this clusterfuck-shitstorm into perspective for me, please?
Letting Greece into the EU was analogous to marrying someone who you fight with all the time under the assumption that "they will change" once you get married.
Of course Greece didn't really change their spending ways and the fact that we are where we are now is only surprising in that it took so long to happen.
I know a few funds who lost a fair bit of money because they predicted a default too far in advance.
blame whoever was responsible for accepting Greece into the monetary union in the first place when they downright faked their economic statistics and obviously noone did any due-diligence?
This is a case where blind hope was supposed to triumph over facts (- hey, it's politics, right?): the deficiencies of Greece's economy were known to everybody but if Greece hadn't "tweaked" its statistics, it wouldn't have been possible to let them enter the EU/ euro zone, so everybody looked the other way.
Why admit Greece in the first place then? The economic opportunities for exporting goods to Greece seem to have been realized, so that part of the bargain held up (- until recently). Also, there was a hope that once Greece was a member of the EU, they would clean up their act and get things straightened. Of course, if you don't impose sanctions and set up strong incentives, the underlying faults don't fix themselves. The one person arguing for administrative reforms in Greece must have ended up feeling like Charlie Wilson making a case for schools in Afghanistan...
While the financial facts presented from greece to the eurozone before acceptance were definately massaged, that was not criminal-level fraud. Other countries had massaged their financial data as well (hint: Italy) to fit into the euro criteria (which, to be frank were quite strict). Things took the wrong turn in greece AFTER acceptance to the EU: the inflow of relatively cheap euros led to a construction boom (yes, a construction boom in a country which has the highest home-ownership in europe, but negligible industry) and massive imports of foreign goods (Not just from germany, in fact german imports were rather low). Then corruption started settling in, in a state that always looked the other way and hid everything under an (apparently huge) rug, and made no attempt to modernize and grow the economy.
Yes, it just comes down to greed and so far, I can follow. The point I do not understand is.. when that blind greed goes horribly, horribly wrong then nobody has to answer and everybody gets bailed out and nothing happens against that.
That's like playing Russian roulette but instead of you, the casino's cleaning personal takes the bullet and you get a handful of cash and "strangely" enough, more and more people join to play on that table...
> hey, it's politics, right?
You summed it up PERFECTLY and couldn't hit the nail more on the head: WHY do we as the people take this kind of abuse and say something like "hey, it's politics, right?". It is basically a widely accepted fact that politicians are corrupt and recent politics is nothing but a PR and media show.. and nothing happens.
Here's my remarks about how the greek political system works:
- Greece is a very recently established democracy (1974), before that greece was like a protectorate, due to a strategic positioning in the edges of the western-eastern block.
- As such, previous generations used to see the state as 'the bad guy' whose raison d'etre was to oppress citizens and maintain class inequality. So it's natural to always try to cheat, steal from "the state" and to pass these attitudes to their children
- Family ties; people can get elected for having a large extended family , and may even end up in the parliament. Are there many developed countries where father, son and grand-son, or uncle and nephew ALL become PMs in the past 30 years?
- It's difficult for new people to enter the political scene, people will not judge you by your CV, but by your ability to trick people to vote for u.
- The media is controlled by businessmen who traditionally have stakes in large (mainly construction) projects. Their main goal is to distract from what matters.
- Justice fails to work, and blames the complex law system for that.
Despite the fact that Greece enters a 30-year period of essentially foreign financial control, the media pretty much focuses on the triumph of no default. Greeks in general have a tendency to hypocritically pretend black is white, so, if anything, the deal will make the political parties who sank the whole country in debt to look as Jesus Savior (I am greek so i hope this is not taken as racist). I doubt anyone (hint, 2 persons: the previous prime minister, the finance minister when we entered the euro) will ever even be called to testify in justice about their wrongdoings. I 'm also curious to see how the rescue plan works out after this dust settles down (september maybe). Also interesting to see the real reaction of markets, after the August 2 distraction goes away
To be fair Jeb Bush hasn't been president, and there are relatively few dynasties in the US (there's also the Kennedy's, the Gore's, the Paul's, but most don't make it to be President)
> Are there many developed countries where father, son and grand-son, or uncle and nephew ALL become PMs in the past 30 years?
Not in 30 yrs (more like 60), but India. J. Nehru, followed by his daughter Indira Gandhi, followed by her son, Rajiv Gandhi.
There's even a reasonably good chance that his son, Rahul Gandhi might become a PM in the future, maybe the next one. Ironically, in his case, given the alternatives, many people actually consider this a good thing.
But overall, I agree, such PM dynasties aren't a good thing.
> So it's natural to always try to cheat, steal from "the state" and to pass these attitudes to their children
Does this mean that - given the context you describe - Greece will be essentially unable to raise the resources needed to pay off even the extended maturity debts? I am merely being curious - please take no offence at my question - but what do you think are the chances that we see a 'hard default' in the coming years?
[edit: i changed my mind]
I am not really optimistic, eventhough the EU will be overseeing the reforms, greece does not have a good record of conformance. In fact it has a very bad record of conformance, and, to be frank, the greek society does not want to change its attitudes. I expect similar renegotiations every 3 or so years. The "hard default" does not really depend on greece, it's a decision of whether the rest of europe allows it. Without EU protection, greece is already bankrupt.
Translation...Greece gets a bailout for itself, bondholders offered bailout if they commit to increase time-periods of loans, Greece bond rating gets clobbered to default rating....
The privatization of Germany in the 90s was so bad that it has now one of the strongest economies and enough money for Greece. And obviously became a third world country.
My guess is that a large-scale privatization in Greece would look more like Eastern Europe's privatizations than like Germany's, i.e. firesale sales to well-connected businessmen.
Independently of who is going to benefit from what will happen from now on, the Greek government will be forced sell everything that belongs to the Greek people at ridiculously cheap amounts just to pay back the loans...
It has happened before, everywhere that IMF went...
Privatizing too much too quickly to pay off loans is analogous to chopping off limbs when you can't pay the mob. It makes the people owed money feel better, but means that they will never really get paid back, because the debtor can no longer function.
I do not agree with you. As far as I know, the loans did not involve collateral ( at least not until now ), so investors are just entitled profits from interest and have no claim on assets.
I don't know if Greece is a third-world country, but definitely the Greek government managed this crisis are such, so it looks like Greece is going to share their fate.
Corriere della Sera (an Italian newspaper) claimed that Finland wanted the Acropolis of Athens as collateral for their part of the loan, so yeah, you can actually ask for way too much.
Markets and especially the financial sector like banks (especially French banks) owning debt from Greece (or CDO) have positively reacted to the announce for a different reason that the one shown in the press IMHO. The major risk for the banks is the inability from a customer to pay their debt. With the current proposal the risk is again moved to the public sector where they will take the part of the debt that Greece cannot pay or pay with difficulties.
So for the banks, it's a great move as their current contribution is just a small part from their revenue removed of the interest rate on the debt while lowering down the risks of unpaid debt.
Without forgetting that the ECB is feeding the banks with a preferential rate (around 1%) for credit given to other countries by the banks with a higher rate (around 3-4%).
So the winner is clearly the financial sector. We removed the risks for you and States will cover by public financing. It's just like the "refinancing" for CDO in 2008...