The Slow Train Wreck!

Greece will reap fast relief from a historic €200 billion ($266 billion) debt restructuring sealed Friday, but the default isn’t likely to end the debt-strapped country’s epic financial problems.

A panel of market participants ruled later in the day that the restructuring constitutes a credit event and would trigger insurance-like contracts that pay off if creditors suffer losses. On Friday, ratings firms Fitch and Moody’s declared Greece in default.

The restructuring will cut some €100 billion from the face value of Greece’s obligations. Yet, Greece remains mired in a long recession; unemployment is at 21%; and even after the write-off, the debt level is well in excess of a year’s economic output.

“Their problems are much greater than the solution that is in front of them,” says Pawan Malik of Navigant Capital in London. “Greece’s ability to come back to the market as a functioning and solvent sovereign is very doubtful.”

Markets aren’t hopeful, and that suggests Greece may face another restructuring—one that could well hit taxpayers of the countries that have been its rescuers.

I read this as the beginning of the end for the Eurozone – France, Spain and Italy are the next big ones to fall. This is like the Icelandic faux prosperity circa 2006, when in fact, Iceland owed more than 800% of its GDP in debt. Every penny (or Krona) went to service debt and it still couldn’t get it done. Went from darlings of International investment savvy to the crazies of finance overnight. Greece, and its people are simply screwed.

Greece said €197 billion of the €206 billion in eligible bonds would be swapped into a package of new securities. That counts both creditors who volunteered for the exchange and those who will be forced into it by the so-called collective-action clauses that Greece had inserted into most of its bonds.

A panel convened by the International Swaps and Derivatives Association determined late Friday that Greece’s use of the collective-action clauses had breached the rights of bondholders, and authorized payouts on the contracts.ISDA said an auction would be held March 19 to determine how much holders of the contracts would be paid. There is a total of $3.2 billion in outstanding contracts, after subtracting the contracts bought and sold by the same firm. The payouts would total no more than that sum. It is beginning to sound like $3.2 Billion is just chump change or rounding errors.

Greece offered the €9 billion in holdouts two weeks to change their minds. At least some of those could be pulled in by other collective-action clauses that Greece said it will try to use.

Evangelos Venizelos, the Greek finance minister, told reporters Friday that the holdouts were “naive” in thinking they would be paid in full.

For Greece, the restructuring means immediate relief. For each €100 in bonds, creditors get €15 in high-quality, short-term bonds issued by the euro zone’s rescue fund, and €31.5 in new Greek bonds that mature 11 to 30 years in the future.

The biggest immediate benefit to Greece is that its problems are put off until another day. It has a €14.5 billion bond due March 20, and it doesn’t have money to pay it.

That bond in its entirety has been forced into the swap, and Greece’s first principal payment on it will now be in 2023.

The swap also cuts Greece’s annual interest burden, which rose to about €16.4 billion last year. Greece will have less debt on which it must pay interest, and the rates are generally lower that what it has been paying.


But the deal has costs. For one, it imposes billions in losses on Greek banks, which will need to be recapitalized, and on Greek pension funds, which will need to be replenished. And the €30 billion used to provide the cash-like bonds to creditors has to be borrowed from the rescue fund. On Friday, euro-zone finance ministers said Greece would get that, along with another loan of €5.5 billion to cover accrued interest payments to creditors.

The swap clears the way for the euro zone to approve billions more in aid loans that Greece needs to cover a persistent budget deficit.

Private creditors have agreed to tender Greek debt, paving the way for a second multi-billion euro bailout.

Euro-zone finance ministers are meeting next week in Brussels, but a senior euro-zone figure, Luxembourg Prime Minister Jean-Claude Juncker, said on Friday that the path was clear for approval of fresh bailout loans for Greece.

The International Monetary Fund‘s chief, Christine Lagarde, said she would propose to the fund’s board that the IMF provide Greece with an additional €18 billion in aid loans over the next four years, on top of the €10 billion in IMF money still to be spent from the first bailout.

Perhaps most crucially, the deal makes Greece largely indebted to other euro-zone countries, and European and international institutions.The euro-zone countries, the IMF and the European Central Bank will be, by far, Greece’s largest creditors. Private bondholders will have roughly €63 billion. Thus, the bulk of any future problems in Greece will become the problems of public entities, not of financial-market players.

These public entities, to increase the chances that they will be repaid, have put Greece on a diet of fiscal austerity. That move has stunted the domestic economy.

On Friday, Greece’s statistics agency said gross-domestic product in the fourth quarter of 2011 fell 7.5% from the year-earlier period, worse than a previous estimate of 7%. Soaring unemployment has bred strong resentment of the austerity policies, and Greece faces elections as soon as this spring. Here it comes folks.

The new bonds that Greece will issue Monday to settle the exchange haven’t begun trading, but on Friday several banks were beginning to offer prices on them, according to people familiar with the matter. The bonds that mature in 2042 were initially quoted between 17% and 22% of face value, according to traders with knowledge of the matter. That suggests creditors see a high likelihood of more Greek losses.

So, bottom line is there is no way Greece can emerge nor is there any way the Eurozone can emerge still intact. I am shocked at the charade. Remember Iceland? Anybody? Huh?


About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

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