Europe’s Latest Swiss Cheese Bailout Package

Needless to say, it’s absolutely riddled with holes. You would think that the Eurocrats had learned by now not to announce a deal has been reached until they tied up, if not all the loose ends, most of them. It’s not their fault, though – there’s just no time left and an infinite number of loose ends. The money from the latest baillout package announced, the amount of which is still uncertain, is conditioned on a whole host of things that are not likely to occur.

First, you have the PSI debt swap operation that is set to be concluded in the next few weeks. Greek Finance Minister Evangelos Venizelos said that “a successful PSI transaction” was required “for continued disbursements by the official sector which are essential for the implementation by Greece of its economic reform programme”. The latest deal envisions a successful PSI involving a 95% participation rate by private Greek bondholders (as well as a reduction of Greek debt/GDP to 120 point 5 percent by 2020).

If that doesn’t happen voluntarily (it won’t) and the Greek government is forced to retro-actively insert collective action clauses into its bonds, then there is a very good argument that the transaction was not successful under the conditions of the bailout agerement. Indeed, the Greek finance ministry is already preparing to submit a draft bill to Parliament that will insert these CACs.

Second, the deal has introduced a new set of bankster-friendly, anti-democratic terms that cannot possibly sit well with the Greek populace. They include a “permanent Troika task force” to be situated in Greece and ensure compliance (impossible), a “segregated account” for quarterly interest payments on Greek debt, and, most ridiculously, a new constitutional provision that ensures debt servicing payments are prioritized over other government spending.

It’s really unclear whether the New Democracy party will stand by any of these degrading committments in the run-up to elections, as it plummets in the polls, but what is perfectly clear is that the Constitutional revision cannot even legally occur until May next year. Brian Reading of Lombard Street Reserach explains why via The Guardian:

Eurozone finance ministers have demanded that the Greek Constitution be revised to give debt payments top priority in government spending. The Constitution forbids any revision before May 2013, five years after the last. A revision is anyway impossible until after the April election and nobody can promise the result.

 

Article 110 of the Greek Constitution lays down the conditions under which it may be revised. No revision is permitted until five years after the last (May 2008).

 

The Constitution require two votes at least a month apart in each of which 60% of all members vote in favour of the need for a revision.

 

In the first session of the following Parliament, the revisions are to be decided, to be passed by a majority of all members. If the ‘need for’ vote is passed by a majority but not 60%, the details must be agreed by 60%.

 

…

 

The Greek Government can promise a Constitutional revision. It cannot deliver for over a year, during which the pernicious consequences of the suicide pact will be obvious to all.

On top of those things, the deal must still be approved by various national governments, including those of Germany, Finland and the Netherlands. There is a distinct possibility that all three, but especially the latter two, will find reasons not to approve the deal in its current form. Given the “debt sustainaibility report” released by the Troika last night, it should be clear to them that this deal is nothing more than an open-ended bailout committment to a country that will not be able to grow its economy and reduce its debt for a long time.

Finally, I will leave you with Open Europe’s take on the “many questions around the second Greek bailout” that remain unanswered, which it states is by no means an exhaustive list. Keep in mind that none of the above has factored in what the Greek populace’s reaction to this latest farcical deal will be, or the numerous unintended consequences for European credit markets and/or litigation that will arise due to the subordination and coercion of Greek bondholders by the ECB “no-loss” swaps and the retro-active CACs.

Many questions around the second Greek bailout remain unanswered

 

Greater losses for private sector bondholders: Reports suggest the Greek government was sent back to the negotiating table with bondholders at least four times during last night’s meeting. Nominal write downs for bond holders now top 53.5% (or around 74% net present value). The leaked Greek debt sustainability analysis (DSA) assumes a participation rate of 95%.

 

Open Europe take: 95%, really? We weren’t convinced the previous threshold of 90% with a lower write down would be reached and that was while potential ECB participation was still on the table. Although this target may have been agreed with the lead negotiators for the private sector, it is far from a cohesive group, diminishing the value of the agreement. It will be interesting to see how bondholders respond to the plan but we think that hold outs could well be more than 5%.

 

Greek ‘prior actions’: The deal includes a list of requirements which Greece must meet in the next week to get final approval for the bailout. These include: passing a supplementary budget with €3.3bn in cuts this year, cuts to minimum wage, increase labour market flexibility and reforms opening up numerous professions to greater competition.

 

Open Europe take: The now infamous €325m in cuts still needs to be specified. The huge adjustments to labour markets and protected professions mark a cultural shift in Greece – pushing these through will not be painless and could result in further riots.

 

Fundamental tensions in objectives of the programme: The DSA notes that the prospect achieving a return to competitiveness while also reducing debt is very small – the massive austerity could induce a further recession.

 

Open Europe take: As we have noted all along the assumption that Greece can impose massive levels of austerity and then return to growth in the next two years is a big leap and almost inherently contradictory. We’d also note that the cuts in expenditure in Greece are larger than have been attempted anywhere in recent memory (successful or failed). Likely to be substantial slippages in the austerity programme while the growth programme remains almost non-existent, essentially closing the book on Greek debt sustainability.

 

Further favourable treatment for the ECB: ECB and national central banks avoid taking losses on their holdings of Greek bonds but promise to redistribute ‘profits’ from these holdings so that they can be used in Greece.

 

Open Europe take: See our previous post for a full discussion of this issue. Markets still don’t seem too worried by suddenly being subordinated by central banks in Europe – they should be. This raises questions of the basic premise that all bonds are treated the same, based on who issued them not who holds them. As we’ve noted before, the whole concept of ‘profits’ is misleading, while any distribution would happen anyway – this is not a commitment from central banks but a further fiscal commitment by the eurozone (should really be included in total bailout funding).

 

Greece may not be able to return to the market even after three years: The DSA points out that any new debt issue will essentially be junior to existing debt, hampering the chances of Greece issuing new debt in 2014/2015.

 

Open Europe take: This point isn’t too clear but given that the eurozone, IMF and ECB will own such a larger percentage of Greek debt in 2014 any new private sector debt will be massively subordinated and at risk of taking losses if anything goes wrong with the Greek programme. Additionally after the restructuring the remaining private sector debt will be governed under English law and will have the EFSF sweetener – further subordinating any new debt issued to the market. Why would anyone want to purchase Greek debt in this situation (especially given the other concerns above)?

 

EFSF funding requirements: The EFSF will have to raise €70.5bn ahead of the bond swap – €30bn in sweeteners for the private sector, €5.5bn to pay off interest and €35bn to provide Greek banks with assets to use to gain liquidity from the ECB.

 

Open Europe take: We’ve already questioned whether raising these funds so quickly can be done and whether the approval from national parliaments will be forthcoming. Even if it is the €35bn is said to fall outside of the €130bn meaning it is expected to be returned swiftly – given the uncertainty over how long banks will need these assets (as long as Greece as declared as in selective default by the rating agencies) this may be a generous assumption.

 

There is also no talk of the money to recapitalise banks. This is a risky strategy given that Greek banks’ main source of capital (government bonds) will have just been wiped out significantly. The needs were previously specified at €23bn, although reports now suggest they could top €50bn. It’s not clear where this money will come from or when it will be raised. The bond restructuring will be like dancing through a minefield for Greek banks.

 

We’re still trawling through the responses, analysis and documents to come out of the meeting – meaning there are likely to be plenty more questions and uncertainties to come.

 

The one thing that is clear is that even if this bailout is ‘successful’, it will set Greece up for a decade of painful austerity and low growth leading to social unrest, while the eurozone will have to provide on-going transfers to help it keep its head above water.

 

Sorry to be killjoys but as Dutch Finance Minister Jan Kees de Jager put it, the deal isn’t “something to cheer about”.