Haven't a Greece thread lately...

[The-Noid]

It sure isn't. Very few economists advocate spending cuts now because it is an exceptionally poor economic idea. The vast majority I have seen call for either holding current spending steady or increasing it in the short term, while enacting long term entitlement and structural debt reform.

For a good case study in what happens when you cut spending now, go look at the divergent economic paths of the US and the UK. Austerity in the short term not only creates additional economic problems, but it has proven to be self defeating by lowering GDP so much that it doesn't even end up closing deficits.

Many economists as well as the rating agencies, argue that the UK has done a much better job than the US.

Spending cuts + monetary easing to lessen the pain.

 

[fskimospy]

and how much is the regional debt? I know, do you? The regional debt is about 4% of GDP. It's around $4T in the US.

Greece like most Euros has more financial debt, compared to bonds so the 4% is harder to track down then the $4T US number.

Again, NPV of pension liabilities is much bigger. That is the killer.

Also, are you really arguing we are printing money to fund our deficit. In a sense the Fed is supposed to be independent on fiscal issues, in the same way the ECB is. The ECB has helped Greece via the SMP, LTRO and unlimited bank liquidity. There is no pseudo gold standard. Balance sheets that expand to 30% of GDP is not a pseudo gold standard.

So in other words you are agreeing with me that Greece's debt/GDP ratio is higher than the US'?

I am most certainly not arguing that we are printing money to fund our deficit, where did you get that idea? We have the ability to print money to fund our deficit if we so choose however, which acts as an incredibly important control on borrowing costs. Not to mention that the Fed is only nominally an independent entity. Greece exerts vastly less control over the ECB, and so comparing the two is silly.

Furthermore, the ECB has only recently begun behaving in this way, and a good thing too as it probably prevented the destruction of the Euro zone. There's a reason why countries who control their own currency have vastly lower borrowing costs than corresponding ones that do not.

 

[The-Noid]

So in other words you are agreeing with me that Greece's debt/GDP ratio is higher than the US'?

I am most certainly not arguing that we are printing money to fund our deficit, where did you get that idea? We have the ability to print money to fund our deficit if we so choose however, which acts as an incredibly important control on borrowing costs. Not to mention that the Fed is only nominally an independent entity. Greece exerts vastly less control over the ECB, and so comparing the two is silly.

Furthermore, the ECB has only recently begun behaving in this way, and a good thing too as it probably prevented the destruction of the Euro zone. There's a reason why countries who control their own currency have vastly lower borrowing costs than corresponding ones that do not.

Just an FYI, you are arguing the fundamental pillars of the Federal Reserve. I don't disagree that the Fed is funding the deficit in this country, however that is not their mandate and they should be as independent as the ECB. Just because the Germans stick more to this doesn't make it more or less right.

Debt to GDP is 4T + 16 or 20 on GDP of 15.38 or 130% compared to 170% in Greece. A more comparable numbers would take into account the NPV of unfunded liabilities. Many of which are funded with investment assets in Greece (that has come from borrowing). Small deviations in these numbers make the numbers much more comparable than simply looking at the headline, 101% D/GDP compared to 166% D/GDP.

I hate to say both numbers really don't matter however. The wall of maturity hits the United States in three more years. Luckily we get to watch Japan's wall of maturity starting this week to get an idea of where we are heading.

Edit: Also, you're right to use the term probably. The Eurozone will destruct. They have just chosen to have it be a solvency event longer term, rather than a liquidity driven event.

 

[The-Noid]

*GREECE CREDIT-DEFAULT SWAPS RISE TO RECORD 76% UPFRONT
*GREECE CREDIT SWAPS SIGNAL 99% PROBABILITY OF DEFAULT

-BBG

Ouch.

 

[alphatarget1]

What happens if some of the investors do not agree to the bond swap? Does that mean Greece will have to default? That means that the CDS people bought would have to be paid, right? Isn't it better for them if Greece does default?

 

[The-Noid]

What happens if some of the investors do not agree to the bond swap? Does that mean Greece will have to default? That means that the CDS people bought would have to be paid, right? Isn't it better for them if Greece does default?

Yes. In theory (everyone is a CDS expert, however this is really the first sovereign default, the rest have all been corporates) if enough holdout on the PSI, then the CAC's will have to be forced into effect. A forced CAC would be seen as a credit event.

I just can't see how ISDA (which is run by the banks) will let there not be a credit event. CDS is a huge profit center for the banks and if participants start to get the idea that CDS is worthless, they lose a huge amount of profit center.

 

[spacejamz]

It sure isn't. Very few economists advocate spending cuts now because it is an exceptionally poor economic idea. The vast majority I have seen call for either holding current spending steady or increasing it in the short term, while enacting long term entitlement and structural debt reform.

For a good case study in what happens when you cut spending now, go look at the divergent economic paths of the US and the UK. Austerity in the short term not only creates additional economic problems, but it has proven to be self defeating by lowering GDP so much that it doesn't even end up closing deficits.

So you don't think the fact that many US Cities having pension liabilities that they don't have the money for (i.e., they are BROKE) is not a problem??? Exactly what do you think is going to happen when these cities can no longer payout these benefits?? The credit ratings of many of these cities going to down the toilet and they won't be able borrow any more money. What do your economists have to say about this???

http://www.kellogg.northwestern.edu/faculty/rauh/research/NMRLocal20101011.pdf

...the total liability for the major pension plans sponsored by the fifty U.S. state governments is approximately $5 trillion using Treasury discount rates, contrary to government accounting, which would point to total liabilities of only $3 trillion. The unfunded liability for the major pension plans sponsored by the fifty U.S. state governments is approximately $3 trillion using Treasury discount rates, contrary to government accounting, which would point to unfunded liabilities of only $1 trillion.

What is clear is that state and local governments in the United States have
massive public pension liabilities on their hands and that they are not far from the
point where those liabilities will impact their ability to operate. Given the legal
protections that many states accord to liabilities, which in a number of cases
derive from state constitutions, attempts to limit liabilities with benefit cuts for
existing workers will go only so far (Brown and Wilcox 2009; Novy-Marx and
Rauh 2010b). The question going forward is how the burden will be distributed
between urban and non-urban areas, between state and local governments,
among the more and less fiscally responsible states, and between local governments
and the federal government. If that question remains unresolved, state and
local fiscal crises may translate into losses for municipal bondholders.

 

[Fern]

What happens if some of the investors do not agree to the bond swap? Does that mean Greece will have to default? That means that the CDS people bought would have to be paid, right? Isn't it better for them if Greece does default?

1st. Greece IS defaulting. The only question in regards to that is if it's going to be an orderly default or a disorderly one.

2nd. Greece has the agreement of a large number of bondholders to take a great big 'haircut' on their bonds. Seems to me those who are agreeing to this (orderly default) are primarily institutional investors.

3rd. Greece is preparing legislation to force the recalcitrant bondholders to accept the agreement. Can Greece do that? IDK, I would think some world court might become involved if the refusing bondholders pursue it.

4th. I suspect some of the bondholders are refusing because of CDS's. As I understand it, they don't pay off if you agree to accept less than face value. As we saw in our financial crisis, this tends to force non-cooperation and the CDS holders wanting bankruptcy. Since that was with private companies and Greece is a country not sure how that works exactly.

Fern

 

[The-Noid]

Fern the difference lies mainly in what are the english law bonds and which are the greek law bonds. Greece can and will force the collective action clause on the greek bonds, however they will have a harder time on the english law bonds.

Some of the comments out lately have revolved around getting a 70% take up to avoid using the cac. Then it would be voluntary and no cds under the current isda opinion. If greece doesn't get 70% or higher participation, then they will cac the greek law bonds, triggerinng cds.

I can explain this better and with some links, however I am on my phone in the car. Ifr has a very good definition.

 

[Doppel]

the US is experiencing growth

Measured how? The couple percent positive GDP certainly doesn't indicate it in light of a 10% deficit.

The US being able to print its own currency is nicer than not, but it's of no relevance for the majority of its liabilities, which are either by rule or practice tied to inflation, so it cannot print away its liabilities. There is an innate imbalance in the US economy, a growing hole of debt used to cover the difference. Just like Greece and most of the West.

 

[Fern]

Hey Noid.

Check this out please: http://blogs.wsj.com/eurocrisis/2012/03/01/at-a-glance-greek-debt-swap-explained/

After reading that I better follow what you've said in your posts above.

But I do have a question:

This part:

WHAT GREECE NEEDS:

Greece will complete the exchange of validly tendered designated securities if at least 90% of the aggregate principal amount currently outstanding of the overall debt has been validly tendered for exchange. If the participation rate is between 75% and 90%, Greece would consult with its European partners on whether to proceed with the deal. If it’s less than 75%, the exchange will be called off. That could derail the €130 billion bailout deal and Greece may be pitched into a disorderly default.

Versus this part:

COLLECTIVE-ACTION CLAUSES:

Collective-action clauses, or CACs, are provisions entering Greek law that bind all bondholders to take part in a debt exchange if a predetermined majority approves of the exchange.

Greece has so far resisted the use of CACs for the fear of triggering the payout of CDS contracts.

Greece could potentially take approvals from private investors holding only a third of Greek bonds outstanding for CACs to be invoked. If investors holding at least 50% of Greek bonds that are outstanding take part in the debt swap, and two-thirds of those investors agree to the amendments, CACs will be invoked.

OK. It appear Greece has two options to proceed with the bond swap.

What do we call/name the the 1st one? (The 2nd one is the "CAC".) Where do these rules come from?

What happens to other 10% if 90% agree?

Why must Greece consult with it's Euro partners if only 75% agree to participate? (I'm going to assume your answer above regarding what happens to the 10% applies to the 25% here.)

IIRC, Greece has already obtained agreement from somewhere around 70%. Is this your understanding as well?

Is it correct to assume that Greek bonds exchanged under the 90% rule or the 75% rule will not trigger CDS payout?

------------------

See this part:

But a failure of the CDS to offer protection against blatant adjustments to Greece’s bond contracts could do even more damage, rendering the entire CDS market worthless and, in the eyes of investors, subject to political manipulation. That in turn could drive investors to dump the bonds of Portugal, Ireland, Italy and Spain, believing that they no longer enjoy the protection of default insurance.

I am a little puzzled why Eurozone govt officials have taken pains to avoid triggering CDS payouts.

Do they not fear the above described effect on the other PIIGS bonds?

Is the CDS payout worse than that effect on PIIG bonds? Or, is there some question of the CDS payouts potential magnitude? I.e., a cascading effect that may be difficult to contain (and therefore quantify).

I'm sort of getting the impression the choice is between 'bad medicine' and 'worse medicine' and we're not quite sure which is which.

TIA

Fern

 

[The-Noid]

The first is the psi private deal that is voluntary. Based on the fact that the troika is looking for debt to gdp reductions to 120%, this assumes about a 75 to 80% take up of all sanns the ecb holdings and a few more. This will not trigger cds as it is voluntary by the holders. If they can't get the take up they go option 2.

If they cac the bonds they can force the cramdown on the holders of greek law debt, a lot of the english law debt trades at a significant premium to the greek law debt because of this. This will get the neccessary amount of participation. This will be a cds trigger as it is a forced loss. This is also the reason some have moved to hold out.

There is also the fact that banks sold cds bond basis postions to get rid of their own greek debt. They sold cds (short credit protection, synthetic long underlying) and greek bonds, otherwise it would have been hard to move the greek debt in the last few months. If the cds doesn't pay out and the bond defaults there will be a lot of mad clients who thought they were hedged.

Greece will payout in some form as cds is a huge profit center. Look at the dtcc data to see how much net notional is outstanding on all of europe. If people lose confidence and close all these postions out, banks are going to lose a lot of income. Its a rock and a hard place for the bank. Payout cds and take the approximate 3.5 billion net outstanding loss, or don't and lose the sovereign cds market.

To put it in perspective if the bonds do cac, greek banks are exposed to the tune of about 20 billion euros. Most banks according to the eba data have managed greek exposure well. The losses banks have taken continue to e in cash bonnds and not cds. Greece and greek banks are screwed no matter what the outcome...

 

[The-Noid]

Hey Noid.

I am a little puzzled why Eurozone govt officials have taken pains to avoid triggering CDS payouts.

Do they not fear the above described effect on the other PIIGS bonds?

Is the CDS payout worse than that effect on PIIG bonds? Or, is there some question of the CDS payouts potential magnitude? I.e., a cascading effect that may be difficult to contain (and therefore quantify).

I'm sort of getting the impression the choice is between 'bad medicine' and 'worse medicine' and we're not quite sure which is which.

TIA

Fern

The EBA detailed net exposures for banks in the Eurozone for CDS contracts by country and bank. The numbers weren't all that bad.

I do think the reason the Eurozone wants to kill CDS is to get rid of the idea of, shorting the cash bonds, buying CDS, raising financing cost for Eurozone countries. Similar to our own banks. Buy CDS, short stock, drive up cost of financing during the financial crisis.

The amount of liquidity in the system from the LTRO via carry trades, means the need for CDS is smaller than it was a few months ago as well in the Euro sovereign and PIIGS bonds market. You can see this in the amount of settled bonds by the SMP since the LTRO went into effect.

I think the CDS market is misunderstood by a lot, however it is also a tool that has a lot of negative connotation in it. The idea behind it is it you are betting only credit risk of the underlying. Given all the attention that CDS gets, it's just as easy to short some of the underlying cash bonds in Euroland (sans Portugal, the rebate is expensive there) however there isn't hardly any attention give to shorting of Eurozone cash bonds and you are shorting credit as well as duration risk, i.e. to counteract duration I need to be long bunds or bobl futures, which adds even more to spread duration. In CDS you can get exposure to just the credit risk you want.

Even through all of this the Eurozone is trying to fix a solvency problem with a liquidity problem. Simply put the Eurozone is growing too slowly to carry their large debt loads. The countries growing the slowest are experiencing the crisis quicker (i.e. the Irish economy stopped due to banking, Greece has a lack of productivity, Spain has high unemployment, Italy has a general lack of productivity in the south and a very productive north). None of the policies put in place so far do anything to help the uncompetitiveness of the Eurozone periphery. All they have done is provide liquidity to roll over debt. Long-term this isn't a solution, short-term LTRO has provided three years to get things in better shape for the eventual breakup of the Euro.

Blah blah, not investment advice, my own opinion, should be considered commentary...also if anyone wants to correct the DV01, PV01 argument between CDS credit exposure and duration risk of short sovereign spreads, feel free. It's Friday night and I don't feel like arguing over a very small percentage of an overall trades size.

 

[Doppel]

Keeps getting worse for Greece as it runs toward a cliff.

http://www.telegraph.co.uk/finance/...f-money-soon-warns-deputy-prime-minister.html

 

[Exterous]

Keeps getting worse for Greece as it runs toward a cliff.

http://www.telegraph.co.uk/finance/...f-money-soon-warns-deputy-prime-minister.html

Greece appears to be playing a very dangerous game of chicken with Germany banking not on their value as a member of the Euro but as the potential first domino. I am not sure its a game I would be playing with a country that is doing as well as Germany is currently doing.

It's anechdotal but from talking with my friends there they are none too pleased about this. They feel Germany can weather the storm and want to cut Greence loose

 

[Exterous]

"This square used to be occupied," said the patrol leader, Nassos Rendekakos. "Full of illegal immigrants. We took it back. We just emptied the square of everyone: Greeks, foreigners, whatever."

But what if they refused to leave?

"There's a good way and a bad way," said Mr Rendekakos. "We know both ways."

They weren't in their black T-shirts on Saturday, but they were still pretty easy to spot. Their hair was shaved at the sides but not at the top; they wore near-identical sunglasses, plus biker jackets and gloves, though the day was warm and sunny.

I swear I have seen this before somewhere....

"It's not Hitler we like," said Mr Rendekakos. "It's the way he used to make the best for his country. Hitler took a country with so much debt, unemployment, just before the edge, as we are here – and he managed to make that country great."

Oh - are we at the part in history where we idolize his accomplishments without acknowledging the horrible things he did to make it happen?

 

[Doppel]

Fewer people all the time are pretending Greece has a clean way out of this. Now even Citi's chief says they'll leave the Euro and suffer a 60% reduction in currency: http://www.cnbc.com/id/47547122

This will have an immediate and massive impact on standard of living for Greeks interested in importing anything as their money becomes worth so little.

 

[Craig234]

NPR had an interesting story on some of this, they interviewed a purportedly typical man on the street in Greece asking him who he blamed, answer was first the Greek government, and second Germany for the deman on austerity (with one example 30% pension cuts).

In Spain, it reported that the banks are being bailed out while education spending is being slashed 20%, and the people again blame Germany's demands for an austerity plan.

They have a point about priorities - that 20% cut threatens the economy of Spain while they take care of the financial class.

People don't appreciate that the abuses of finance hurt the people.

 

[Pr0d1gy]

The IMF Strikes Back....again.

"As we can see you are continuing this destructive policy, so we warn you that you cannot make us fight against our brothers," the Greek Police Federation said in an open letter to the "troika" of lenders: the European Commission, European Central Bank and International Monetary Fund.

"We warn you that as legal representatives of the Greek police, we will issue arrest warrants for a series of legal violations ... such as blackmail, covert abolition or erosion of democracy and national sovereignty."

At least they understand what is really going on and aren't going to accept the BS.

 

[From Abroad]

Between the IMF (Greece out of the Eurozone) or troika (Euro still goes on in Greece) help, what difference does this make?

Because, even though they left euro, they will need help of the IMF to readjust its finance with a new currency (balance its deficit). And this means some "unpopular measures" applied. So, same scenario anyway.

I'm talking about this:

“Greece’s economy is still uncompetitive,” she said in a telephone interview. “The low value of the new currency will almost inevitably bring about a massive balance of payments deficit. So that means the country will have to go to the IMF.”

Negotiations with the IMF would probably drag on for most of the weekend, with Greece trying to win compromises over implementing budget cuts. The IMF likely would seek the strictest possible conditions for aid from a country that has violated past terms, to ensure the support of poorer, emerging- market shareholders.

http://www.bloomberg.com/news/2012-...it-highlights-hazards-in-46-hour-weekend.html (great article, by the way)

The Greek's don't wanna leave Eurozone. But they don't wanna austerity as well. They need to decide what they want. And it will be on June 17th (new elections).

 

[Doppel]

NPR had an interesting story on some of this, they interviewed a purportedly typical man on the street in Greece asking him who he blamed, answer was first the Greek government, and second Germany for the deman on austerity (with one example 30% pension cuts).

In Spain, it reported that the banks are being bailed out while education spending is being slashed 20%, and the people again blame Germany's demands for an austerity plan.

They have a point about priorities - that 20% cut threatens the economy of Spain while they take care of the financial class.

People don't appreciate that the abuses of finance hurt the people.

Blaming Germany is like blaming your bank on your ability to not pay rent because it's gotten tired of lending you money that you have no damn hope of paying back.

The greeks do have their government to blame because it represents them and has done what they have voted it to do for years and years.

 

[Craig234]

Blaming Germany is like blaming your bank on your ability to not pay rent because it's gotten tired of lending you money that you have no damn hope of paying back.

No, it's not. You have a lot to learn about the issues in international finance.

 

[Doppel]

No, it's not, and the fact you say it is suggests telling you otherwise is a waste of time.

isnt telling me otherwise what you just did? I agree it was a waste of time.

Germany owes Greece nothing.

 

[Greenman]

isnt telling me otherwise what you just did? I agree it was a waste of time.

Germany owes Greece nothing.

This. When did Greece become Germany's red headed bastard step child? How many years are they supposed to pay the Greek's bills?

 

[the DRIZZLE]

NPR had an interesting story on some of this, they interviewed a purportedly typical man on the street in Greece asking him who he blamed, answer was first the Greek government, and second Germany for the deman on austerity (with one example 30% pension cuts).

In Spain, it reported that the banks are being bailed out while education spending is being slashed 20%, and the people again blame Germany's demands for an austerity plan.

They have a point about priorities - that 20% cut threatens the economy of Spain while they take care of the financial class.

People don't appreciate that the abuses of finance hurt the people.

Greece isn't like Ireland where the government took on the debts of the banks. The Greek debt was run up over 20 years and used to pay the salaries of civil servants, build infrastructure, provide education and social services, and all the other normal functions of government. The fact that it wasn't spend wisely is not the creditors' faults. Given that, there is not a credible moral argument for default.

The only role international finance played was that they helped Greece hide the extent of its deficits, they did not directly benefit from the spending that caused them.