From Mark Grant, author of "Out of The Box and onto Wall Street"
Greece---Round III
We are finally getting some answers and that is the good news, maybe the only good new really. The Greek debt tender has ended and 85.8% of the bond holders have tendered. This is the number for the Greek law bonds but please note that the participation for the English law bonds was only 70% so that I would guess that not only will the English law bondholders sue for Estoppel but they will sue for acceleration, immediate payment, as an illegal CAC was implemented. This was my lead projection for the outcome and in-line with consensus thinking. This is just the beginning, however, of a number of incidents that are about to transpire. Next there will be suits in the Swiss courts, the British courts and in the American courts concerning the retroactive “Collective Action Clause” which may not be legal in other jurisdictions besides Greece and the European Union. Never, ever forget that the EU implicitly has gone along with a retroactive clause and that if it can be done in Greece that it then can be done for any other nation in Europe and if it can be done to force bond holder participation that it can be done for any other clause in any sovereign indenture in Europe. Further the ECB and the EIB have exempted themselves for the CAC which is the new template for how things will be handled in Europe. The European Union may well have a moment to cheer but the reactions of bondholders will be punishing in my estimation as the LTRO money runs out and as nations on the Continent come to the markets for additional financing.
So now we wait on the ISDA ruling which will be coming shortly to determine if the CAC triggered the CDS contracts. If they did then we will await to see how $75Bn in the CDS contracts are to be settled and if there is any institution that becomes impaired by having to settle up. Further out we will see the results of all of this on many balance sheets in Europe and the impact to the financials of many banks and insurance companies.
The Fun Keeps Coming
Since the ratings agencies have to post 12 hours in advance for any rating change it will not be until tonight or perhaps tomorrow until we see their opinions. Given what S&P and Fitch have previously said however I think the safe assumption is that the country will be placed in “Default” which will trigger all kinds of other clauses in a variety of contractual obligations. For the sovereign there are $90Bn in derivative contracts outside of the CDS contracts that may have trigger language depending upon the ratings agencies. We will also see what happens with Municipal contracts and then as the Greek banks will most probably follow and be placed in “Default” we will see what securitizations get triggered, what collateral agreements get unwound, what inter-banking lending agreements mis-fire and what securitizations at the ECB get returned to the banks of origin.
The Debt of Greece
The somewhat amusing part of this entire transaction is that the debt of Greece has been INCREASED. Greece and the EU handed private holders $138Bn in write-offs but with the addition of the new loan, $171Bn, the gross debt for Greece increased by $33Bn and this is if all of the legal challenges favor Greece. The total debt of Greece (sovereign, municipal, corporate and bank) has just increased from $1.20 Trillion to $1.233 Trillion and all accomplished by this brilliant plan that did nothing except to tag investors and ramp up the debt load for the country. Take this and add in the austerity measures and perhaps demands for more coming later today as the EU has its summit and an economy that is quickly sinking into the sea and unemployment that is surging and then you can visualize that the absurd has become the impossible and quickly conclude that more Greek loans will have to be forthcoming; or not with some form of Greek exit. The much bandied about notion that all of this will reduce the Greek debt to GDP is little more than a joke. For the past two years there has not been one, one, accurate projection for Greece concocted by the IMF/EU/ECB and I see no end to this now. Some quick math on my part indicates, in 2020, a debt to GDP ratio exceeding 170% and that is being kind and using optimistic assumptions. Just this morning the new numbers released for Greece showed a 7.50% deficit increase as opposed to the projected -5.50% number. This is one more case of quite inaccurate projections and a worsening economy for the country.
The IMF Contribution to Greece
The IMF has tentatively offered $17Bn for the next round of Greek funding while the EU expected $56Bn keeping the IMF ratio the same as in the first round of the Greek bailout. The IMF has said that it will not increase its position without a larger firewall and this is something that Germany has refused to do to date. I ask then where is the $39Bn going to come from then as no government in Europe has approved funds to make up for the deficit. Then as this morning the EU has indicated that any new funds may only be released in tranches we may find that the EU releases money to pay off their banks and other financial institutions but with only a paltry sum released to be used in Greece. The IMF/EU contribution may become quite fragmented and we may hear screams emanating from Athens soon.
The Next Continental Plays
Keep your eyes on Portugal. Very poor economics that are worsening and I think they may be back to the till quite soon. Then watch Spain as they are the first country to publically tell the EU to “Shove It” as they are sticking to their 5.8% deficit and refuse to adhere to the EU mandated 4.40% number as the maximum debt allowed. They have also refused additional taxes and additional austerity measures as several other European nations have cried "foul" and threatened to demand penalties and fines for the country. Then turn to the north and watch France as with elections looming on April 22, run-off on May 6, that Sarkozy appears to be the loser and the most likely winner, Hollande, supports economic and financial policies that are in direct opposition to the policies laid out by the German Chancellor.
More Data
As more information is released today and over the weekend I will try to provide some commentary as we all look to the meaning of things and not to the manipulated headlines. The situation is complicated, convoluted and the appreciation of the consequences of the decisions and of the unintended consequences of the decisions will loom large in making correct investment choices. As far as I am concerned the Great Game remains in play.
Greece---Round III
We are finally getting some answers and that is the good news, maybe the only good new really. The Greek debt tender has ended and 85.8% of the bond holders have tendered. This is the number for the Greek law bonds but please note that the participation for the English law bonds was only 70% so that I would guess that not only will the English law bondholders sue for Estoppel but they will sue for acceleration, immediate payment, as an illegal CAC was implemented. This was my lead projection for the outcome and in-line with consensus thinking. This is just the beginning, however, of a number of incidents that are about to transpire. Next there will be suits in the Swiss courts, the British courts and in the American courts concerning the retroactive “Collective Action Clause” which may not be legal in other jurisdictions besides Greece and the European Union. Never, ever forget that the EU implicitly has gone along with a retroactive clause and that if it can be done in Greece that it then can be done for any other nation in Europe and if it can be done to force bond holder participation that it can be done for any other clause in any sovereign indenture in Europe. Further the ECB and the EIB have exempted themselves for the CAC which is the new template for how things will be handled in Europe. The European Union may well have a moment to cheer but the reactions of bondholders will be punishing in my estimation as the LTRO money runs out and as nations on the Continent come to the markets for additional financing.
So now we wait on the ISDA ruling which will be coming shortly to determine if the CAC triggered the CDS contracts. If they did then we will await to see how $75Bn in the CDS contracts are to be settled and if there is any institution that becomes impaired by having to settle up. Further out we will see the results of all of this on many balance sheets in Europe and the impact to the financials of many banks and insurance companies.
The Fun Keeps Coming
Since the ratings agencies have to post 12 hours in advance for any rating change it will not be until tonight or perhaps tomorrow until we see their opinions. Given what S&P and Fitch have previously said however I think the safe assumption is that the country will be placed in “Default” which will trigger all kinds of other clauses in a variety of contractual obligations. For the sovereign there are $90Bn in derivative contracts outside of the CDS contracts that may have trigger language depending upon the ratings agencies. We will also see what happens with Municipal contracts and then as the Greek banks will most probably follow and be placed in “Default” we will see what securitizations get triggered, what collateral agreements get unwound, what inter-banking lending agreements mis-fire and what securitizations at the ECB get returned to the banks of origin.
The Debt of Greece
The somewhat amusing part of this entire transaction is that the debt of Greece has been INCREASED. Greece and the EU handed private holders $138Bn in write-offs but with the addition of the new loan, $171Bn, the gross debt for Greece increased by $33Bn and this is if all of the legal challenges favor Greece. The total debt of Greece (sovereign, municipal, corporate and bank) has just increased from $1.20 Trillion to $1.233 Trillion and all accomplished by this brilliant plan that did nothing except to tag investors and ramp up the debt load for the country. Take this and add in the austerity measures and perhaps demands for more coming later today as the EU has its summit and an economy that is quickly sinking into the sea and unemployment that is surging and then you can visualize that the absurd has become the impossible and quickly conclude that more Greek loans will have to be forthcoming; or not with some form of Greek exit. The much bandied about notion that all of this will reduce the Greek debt to GDP is little more than a joke. For the past two years there has not been one, one, accurate projection for Greece concocted by the IMF/EU/ECB and I see no end to this now. Some quick math on my part indicates, in 2020, a debt to GDP ratio exceeding 170% and that is being kind and using optimistic assumptions. Just this morning the new numbers released for Greece showed a 7.50% deficit increase as opposed to the projected -5.50% number. This is one more case of quite inaccurate projections and a worsening economy for the country.
The IMF Contribution to Greece
The IMF has tentatively offered $17Bn for the next round of Greek funding while the EU expected $56Bn keeping the IMF ratio the same as in the first round of the Greek bailout. The IMF has said that it will not increase its position without a larger firewall and this is something that Germany has refused to do to date. I ask then where is the $39Bn going to come from then as no government in Europe has approved funds to make up for the deficit. Then as this morning the EU has indicated that any new funds may only be released in tranches we may find that the EU releases money to pay off their banks and other financial institutions but with only a paltry sum released to be used in Greece. The IMF/EU contribution may become quite fragmented and we may hear screams emanating from Athens soon.
The Next Continental Plays
Keep your eyes on Portugal. Very poor economics that are worsening and I think they may be back to the till quite soon. Then watch Spain as they are the first country to publically tell the EU to “Shove It” as they are sticking to their 5.8% deficit and refuse to adhere to the EU mandated 4.40% number as the maximum debt allowed. They have also refused additional taxes and additional austerity measures as several other European nations have cried "foul" and threatened to demand penalties and fines for the country. Then turn to the north and watch France as with elections looming on April 22, run-off on May 6, that Sarkozy appears to be the loser and the most likely winner, Hollande, supports economic and financial policies that are in direct opposition to the policies laid out by the German Chancellor.
More Data
As more information is released today and over the weekend I will try to provide some commentary as we all look to the meaning of things and not to the manipulated headlines. The situation is complicated, convoluted and the appreciation of the consequences of the decisions and of the unintended consequences of the decisions will loom large in making correct investment choices. As far as I am concerned the Great Game remains in play.
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