It starts with the opening paragraph (emphasis added),
"European leaders cajoled bondholders into accepting 50 percent writedowns on Greek debt and boosted their rescue fund’s capacity to 1 trillion euros ($1.4 trillion) in a crisis-fighting package intended to shield the euro area."
Later in the article as to the "Voluntary Greek Debt write down" ,
"Europe’s leaders took the unusual step of summoning the banks’ representative, Managing Director Charles Dallara of the Institute of International Finance, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.
Dallara squared off with a group led by Merkel and French PresidentNicolas Sarkozy around midnight after issuing an e- mailed statement that “there is no agreement on any element of a deal.”
Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it.” Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks.”
"Voluntary", as in with a gun to your head and as in, "This is the decision that has been made for you-you decide, by the way, you have no choices!"
As to the actual plan and leveraging of the EFSF,
The article continues...
"Leverage Options
Under plans to be spelled out in November, the fund will be used to insure bond sales and to create a special investment vehicle that would court outside money, from public and private financial institutions and investors."
"Europe cast about for more international money to aid the rescue, with France’s Sarkozy set to call Chinese leader Hu Jintao tomorrow with the goal of tapping into the world’s largest foreign exchange reserves."
So as I said before, this is a "plan", there is no groundwork as to how the money will be raised. As a private investment, it doesn't seem like the best deal. As for China, if it was very likely China would be the savior of Europe, why wasn't that worked out already? Other BRICS countries have already said no to the idea.
This was a quick slap together deal, "we'll figure out the details later" as is clear from IMF director Christine Lagarde,
"It will be important to detail further the modalities of how this enhanced EFSF will operate and deliver the scale of support envisaged,” IMF Managing Director Christine Lagarde said."
The Banking reserve requirements have been left in place with the same problems outlined 2 weeks ago.
Beyond Bloomberg:
European leaders agreed, in principle, to boost the firepower of the EFSF to approximately EUR 1trl using a combination of a special purpose investment vehicle and a debt-insurance scheme. The leaders also struck a deal with private banks and insurers for them to accept a 50% loss on their Greek government bond holdings
The entire Greek bond curve, which show that while bond maturing around 1 year from now have since jumped to just shy of the 50 cent on the dollar haircut level, bonds further down the curve are just not buying it and continue to trade in the 30s! In other words, while Europe may have convinced the EURUSD shorts that everything is fixed, Greek bondholders are certainly not convinced.Those who believe that the ECB will go ahead and carry through on its promise of a 50% haircut and no further, should be buying up the entire curve which trades below 50. FX may be fooled but the bond market certainly isn't. If anything, judging by prevalent values, even assuming some modest accrued interest, the bond market is expecting a final haircut of about 62%.
And as predicted, if they'll do it for Greece, why won't Ireland and Portugal sabotage their economies to get the same treatment. It didn't take long.
"When sharing our kneejerk reaction to yesterday's latest European resolution, we pointed out the obvious: "Portugal, Ireland, Spain and Italy will promptly commence sabotaging their economies (just like Greece) simply to get the same debt Blue Light special as Greece." Sure enough, 6 hours later Bloomberg is out with the appropriately titled: "Irish Spy Reward Opportunity in Greece’s Debt Hole." Bloomberg notes that Ireland has not even waited for the ink to be dry before sending out feelers on just what the possible "rewards" may be: "Greece’s failure to cut spending and boost revenue by enough to meet targets set by the European Union and International Monetary Fund prompted bondholders to accept a 50 percent loss on its debt. While Ireland won’t seek debt discounts, the government might pursue other relief given to Greece, including cheaper interest payments on aid and longer to repay it, according to a person familiar with the matter who declined to be identified as no final decision has been taken." There is one very important addition here: "While Ireland won't seek debt discounts" yet. And seek it will: after all, all Ireland needs is for its economy to mysteriously resume its deterioration. Purposefully. Impossible you say? Well, maybe. Or maybe the tricky Irish statistical bureau can just pull a page from their Greek colleagues on just how this is done. And Ireland is just the beginning. Very soon, and by that we mean 24-48 hours, every country in Europe that is undergoing "austerity" (which in Italy's case means increase the retirement age by 2 years over the next 15 years, or 49 days per year), will see its striking (and rioting) fringe elements demand just the same that Greece got, and probably far more. Which then goes right back to the question: yes, French exposure to Greek banks is limited. But what about Irish, Portugues, Spanish and finally Italian exposure? Will that be something to be a little more worried about?"
And Finally, look who is being rewarded and who is being punished.
"Greek, Spanish, Italian and French bonds all rallied today, with the spreads over benchmark German bunds narrowing. The yield on German 10-year bonds jumped eight basis points, the most in more than 11 weeks, to 2.11 percent at 10:05 a.m. London
The yield on Greek bonds due in October 2022 fell 117 basis points to 24.15 percent, Spanish 10-year yields dropped 16 basis points to 5.32 percent and Italy’s 10-year bonds advanced for a second day, with yields falling 13 basis points to 5.81 percent."
So the backstop to the EU crisis, Germany, is now seeing their bonds sold off while the PIIGS rally. Remember, the yield moves opposite the price of the bond and a rising yield means the bonds of Germany are being sold as there is a perceived increased risk there. Wouldn't it be ironic if the bond vigilantes took this plan to save the core from contagion and actually attacked the core for backstopping what seems to be a hastily thrown together, not very well thought out (in terms of consequences) plan, in effect, just to meet a G20 deadline?
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