Rumors Start Early: Greek Creditors "Ready To Accept" 3.75% Cash Coupon But With Untenable Conditions

Submitted by Tyler Durden on 01/26/2012 07:07 -0500

• Bond
• Central Banks
• Creditors
• default
• European Central Bank
• France
• Greece
• International Monetary Fund
• Italy
• Reuters

As a reminder, the primary reason why the Greek PSI deal "officially" broke down last week, is because the European Fin Mins balked at the creditor group proposal of a 4%+ cash coupon. So now that creditor talks, which incidentally don't have a soft deadline so they can continue indefinitely, or until the money runs out on March 20, whichever comes first, have resumed we already are getting the first totally unsubstantiated "leaks" that negotiations are on the right path. As various US wires reported overnight, including DJ, BBG and Reuters, citing completely "unbiased" and "unconflicted" local Greek media, "Greece's private creditors are willing to improve their "final offer" of a four percent interest rate on new Greek bonds in order to clinch a deal in time to avert a messy default, Greek media said on Thursday without quoting any sources. With time running short ahead of a major bond redemption in March, private creditors are now considering an average coupon of around 3.75 percent on bonds they will receive in exchange for their existing investments, the newspapers wrote." All is good then: the hedge funds will make the proposal to Europe and Europe will accept, right? Wrong. "Another daily, Kerdos said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer, which it said could bring the average interest rate to about 3.8 percent." And that as was reported yesterday is a non-starter. So in other words, the latest levitation in the EURUSD started at about 4am Eastern is nothing but yet another rumor-based attempt to ramp up risk. Only this time the rumor is actually quite senseless, which probably explains why even the market which has been completely irrational lately, has seen the EURUSD drop from overnight highs. That said, expect this rumor to be recirculated at least 5 more times before end of trading.
More on this latest rumormill from Reuters:

Greek bankers and government officials said they had not heard of any new proposal from the creditors' negotiators, after local media reported they were willing to improve their "final offer" of a four percent interest rate on the new bonds to about 3.75 percent.

One Greek daily, Kerdos, said participation of public sector creditors including the ECB in the swap deal was a pre-condition for that offer.

"Until last week, we knew that the steering committee was authorised to concede up to 3.8 percent for the average coupon," one senior Greek banker told Reuters.

"But things are once again up in the air. You have to deal with politicians and 15 different governments asking for different things. We haven't got anything clear from the IIF yet, discussions start today."

Euro zone ministers rejected on Monday the creditors' offer of a 4 percent coupon on new bonds, increasing the chance that Athens would have to enforce losses. Greece and its EU/IMF lenders were holding out for a 3.5 percent interest rate.
The ECB had ruled out taking voluntary losses on its Greek bond holdings but is now debating how it would handle any forced losses and whether to explore legal options to avoid such a hit, central bank sources told Reuters on Wednesday.

One source close to talks among ECB policymakers said that while France, Italy and the ECB board in Frankfurt were against accepting losses, some national central banks, which have expressed reservations over the bond purchases from the start, now accepted that losses may be unavoidable.

"The ECB will not take losses on its Greek bond holdings voluntarily ... but there is a fierce debate within the ECB on how to handle forced losses," the source said.

The best solution might be for ECB to take a haircut on its Greek bonds at the discount they were picked up at by the central bank via its bond-buying programme, one senior European banker not involved in talks said.

"Taking any hit beyond that discount (that the bonds were bought at) would unleash a Pandora's Box. It would raise so many issues about the fiscal integration of European debt, as the losses would have to be shared by the central banks. That would effectively be euro bonds," the banker said.

Finally:

The chairman of BNP Paribas, one of the banks on the committee leading talks for creditors, suggested on Wednesday that bondholders would not retreat from their position easily.

Needless to say, it is one thing for one hold out hedge fund to have done the IRR analysis and say it will sue just for nuisance value. It is something else for a major bank to be on the hold out group.