The economic dramas of Greece have been going for so long now that I suspect that many people don’t realise the significance of the historic event that they witnessed last week with the nation’s default. Given the event I thought I would spend sometime today going through the details and also what it means for the future of the country and more broadly, Europe.
Firstly I think it is important to remind everyone that what happened on Friday was exactly what the European financial elite have been telling us for over two years could never happen because they had a credible plan to deal with the problems of Greece. I obviously disagreed with this prognosis and given the delusional policies of Europe considered Greece’s default an inevitable event. In fact, I wrote a post back in May 2011 with that exact title. I’m not going to bore you by re-hashing old news articles ( you can all use google ) but here is one of my favourite “statements of delusion” by the ECB’s ex-president, Jean-Claude Trichet, from July 2011.
“Speculating on Greece defaulting is a sure way to lose money”
I guess hedge fund manager Kyle Bass didn’t hear Trichet clearly. Moving on…
Before the default on private sector holdings, Greece had a total of €350billion in direct government debt. The private sector default is a component of an IMF/EU master-plan which supposedly has the outcome of getting Greece down to 120% debt to GDP by 2020. This number in itself is far too high to really be sustainable but appears to have been chosen because that is the ratio that Italy will have shortly and therefore a lower figure is politically challenging.
The other issue with the plan is that it is based on the premise that the Greece started recovering 3 months ago and its turn around will be swift, reaching a primary surplus by 2014. The latest figures out of Greece over the weekend show GDP fell 7.5% YoY in Q4 2011, industrial production continues to collapse, and unemployment is over 20% and still climbing. In other words, they are nowhere near a recovery.
Of the total of Greek debt, the PSI involves €206 billion with €177 billion (86%) under Greek law. The voluntary participation rate was 85.8% which totals €152bn. Greek has instigated collective action on the outstanding amount to bring the total to 100%. Over the weekend the International Swaps and Derivatives Association (ISDA), the body that makes credit event determinations, concluded that this action constituted a credit event meaning Credit default swap contracts would need to be paid on Greek sovereign debt. More on this point later.
Along with the Greek law bonds, 69% or €20billion worth of foreign law bonds were also submitted for as part of the PSI (private sector involvement). At this stage it is unknown exactly what will be happening with the outstanding €9 billion worth, but this will be decided in early April. So far, including CACed bonds, the total amount of participating bonds are €197 billion or 95.6%.
Under the PSI deal Greece will also hand out new bonds with a combined value of 46.5% of the original bonds, which at this stage totals €91.6 billion, meaning a write down of approximately €105.4 billion. Sounds good…
…. Now the bad news. Greece needs to pay €35 billion for the ECB Credit Enhancement Facility Agreement, which will enable Greece to finance a repurchase its own bonds held by eurozone central banks through the ECB in order to rollout of existing repos under old bonds. On top of this they will use €23 billion to recapitalise the Greek banks after the bailout and also approximately €6 billion to pay off their accrued interest debt on bonds held by the official sector. So taking these into account Greece will be just €41.4bn better off from the deal.
This €41.4bn assume that the €23 billion is all that the banks need and that other institutions will require no further funding. In reality, however, it is likely that the banking system will need far more than this number to meet European Banking requirements by Jun 30. There is also the question of the Greek pension funds who will have taken part in the PSI and therefore seen approximately €20 billion disappear.
Taking all this into account it is possible that any of the money left over from the PSI deal will eventually be swallowed up keeping the internal structures of Greece afloat, meaning that Greece actually ends up €130billion more in debt – the value of the entire second bailout – once all the dust settles. So although the private sector will now have a significantly smaller exposure to Greece’s government debt the official sector, and therefore the European taxpayer, will be left holding over €350bn.
However, there is some good news. For the next 10 years the rate on the new bonds is just over 2.5% and the funds from the official sector will be +150bps over the Interbank rate. So even though Greece will still have a massive public debt, roll-over payments will be under 4% of GDP. If Greece is able to get itself back to a small primary surplus and actually show some growth then it is feasible that it could begin to pay down its public sector debts.
That of course is still a huge ask. The largest immediate issue with Greece’s economy isn’t the coupon on its bonds, it is that austerity is killing the economy and this isn’t going to change post-bailout. There are billions of dollars in Greek government budget cuts over the coming years and there will now be a number of new European instruments in place to make sure it happens. With unemployment already at 21% and the economy showing sign of accelerating collapse it really is no wonder that markets are already pricing Greece’s post PSI bonds for default and the rumours of yet another bailout have already started.
Speaking of default, it looks like the Austrian taxpayer is the first casualty of the Greek CDS trigger after one of the countries already bailed out banks took another nosedive due to the exposure.
Austria is facing a capital injection of as much as 1 billion euros ($1.3 billion) into KA Finanz AG less than two weeks after bailing out Oesterreichische Volksbanken AG. (VBPS)
The International Swaps & Derivatives Association yesterday ruled that Greece’s use of collective action clauses forcing investors to take losses under the nation’s debt restructuring will trigger default insurance payouts.
In a statement before ISDA’s decision, KA Finanz said it may have risk provisions of about 1 billion euros if credit- default swaps on Greece it has written are activated. That includes charges of 423.6 million euros on an assumed loss quota of 80 percent, it said.
I wonder if that will be the last.
So as you can see from the above figures, Greece’s trouble are far from over. There is still the issue of what to do about the rest of the non-Greek law bonds to deal with, including possible legal action, and I am sure the coming April election will spark a whole new round of risk. More importantly let’s not forget this is just tiny little Greece. We still have all the other periphery nations to deal with yet.