The Greek Deal

Just reading the financial media, you would think all is done, all is well, that is not at all what was said in the Finance Minister's statement last night. A few key take aways:

-A successful PSI operation is a necessary condition for a successor  program.

The Eurogroup acknowledges the common understanding that has been reached between the Greek authorities and the private sector on the general terms of the PSI exchange offer,covering all private sector bondholders. This common understanding provides for a nominalhaircut amounting to 53.5%. The Eurogroup considers that this agreement constitutes anappropriate basis for launching the invitation for the exchange to holders of Greek government bonds (PSI). A successful PSI operation is a necessary condition for a successor  programme. The Eurogroup looks forward to a high participation of private creditors in thedebt exchange, which should deliver a significant positive contribution to Greece's debtsustainability.



 The terms of which just got a lot worse. The IIF who supposedly is negotiating on behalf of the private bond holders in the Greek Debt Swap (PSI) can agree to anything in principle, it has been shown they represent about 12.2% of Greek bondholders. The leaked Greek Sustainability report envisioned 95% of bond holders agreeing to a swap, the report alone probably severely diminishes that probability. Furthermore the haircut is deeper since last night from 50% to nearly 54% or about 74% of present net value. A "successful" PSI program is a key precondition to the program, however the key definition of successful went totally undefined.  The PSI results will determine the exact size of the official sector’s contribution to the second bailout package. You can see the potential for the PSI not getting done or not to the satisfaction of the Troika giving them an easy out on a VERY complicated issue that is thus unresolved.




-The Agreed upon plan must still pass all Parliaments involved, this was simply an outline of a plan for them to vote on.

The Eurogroup considers that the necessary elements are now in place for Member States to carry out the relevant national procedures to allow for the provision by EFSF of (i) a buy back scheme for Greek marketable debt instruments for Eurosystem monetary policy operations,(ii) the euro area's contribution to the PSI exercise, (iii) the repayment of accrued interest on Greek government bonds, and (iv) the residual (post PSI) financing for the second Greek adjustment programme, including the necessary financing for recapitalisation of Greek banksin case of financial stability concerns.

 National procedures for the ratification of this amendment to the Greek Loan Facility Agreement need to be urgently initiated so that it can enter into force as soon as possible.

As you can see, there is no deal until it is ratified by each of the member states. These quotes are directly from the press release. The German parliament will seek to approve deal on Feb. 27, Finland expects to discuss bailout in week of March 12, Dutch Finance Minister Jan Kees de Jager has mooted possibility of waiting until after Greek elections (expected April 8), according to Rabobank.

 A quick study of the math reveals that Greece will get about 19 cents on the Dollar and the rest of the money is the sovereign nations of Europe paying back their banks with the money they have supposedly lent to Greece. Greece is now nothing more than a conduit for the nations of Europe to pay back their own financial institutions. 

-The IMF is "expected" to participate, but has given no assurances.

"with the expectation that the IMF will make a significant contribution,additional official programme of up to 130 bn euro until 2014"

There are serious assumptions here that leading nations in the IMF such as the US will participate, when Congress is considering a law banning the use of IMF money in a EU bailout, remember, the IMF is largely the US. The IMF no longer wants to supply EUR 30bln to the bailout fund because of Greece’s failure to implement reforms, according to German press.

-Greece’s government has reserved right to enact CACs

Successful PSI operation is a necessary condition for a success of the program: now this is an issue, since the PSI will almost certainly fail and CACs will have to be enforced which bring up the question - Are the usage of CACs in the "bailout" a Material Adverse Change clause, and is thus the loophole for collapsing the deal altogether? CACs would almost certainly trigger Credit default and CDS.

-Greek Parliament must change constitution to allow for Troika oversight

"Greek parliament to vote on a constitutional provision to ensure debt servicing payments prioritized

Quarterly interest rate payments to be paid into a segregated account. A permanent ‘troika’ task force will be in Greece to ensure adherence to the terms and conditions of the package"

We knew this was coming, either from Germany or the Troika. This is part of the deal announced, Greece must submit to the will of the Troika, can they pass such a vote in which they give up a large part of their sovereignty? This is a constitutional change. 

-The deal includes a list of requirements which Greece must meet in the next week to get final approval for the bailout

Such as: "Passing a supplementary budget with €3.3bn in cuts this year, cuts to minimum wage, increase labour market flexibility and reforms opening up numerous professions to greater competition."

Essentially, more austerity measures.

-The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

The EFSF has had trouble raising $3 bn in the past, how they pull this off so quickly will be interesting, especially considering they need national parliamentary approvals first and the date for approving these measures in certain countries may stretch out to April!

Lastly, in my brief presentation of only a few of the issues, is multiple lawsuits from private creditors, at least  $18 bn of the Greek debt is governed under English law with stronger bond holder protections. The ECB transfer of Greek bonds last week may have been illegal and trigger a default, the use of retroactive CACS will almost certainly be considered illegal and challenged in court along with a likely default from the rating's agencies. So as you can see, a deal is no where near done and leaves so many holes wide open for this to collapse, it almost seems it was written with the sole intent of failure. There are so many contradictions, misrepresentations, and timelines for official actions that are necessary that all conflict with the terms, it is simply mind-boggling.

This is about 1/4 of the issues and questions I have collected and more pop up every hour. At least Europe is consistent in putting together a plan that is full of loopholes and has been able to get the media to pass it off as a done deal like they have so many times before, the leveraging of the EFSF which has been a total failure certainly comes to mind.