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Monday, July 04, 2011 1:52 PM


S&P Warns Greek Bailout Plan Constitutes Default; Greece at Risk of Missing June Target; Spoon Feeding will Continue Until Greece Dies


Before receiving the next bailout tranche, Greece May Have Missed June Primary Balance Target

Greece is at risk of missing a key budget target in June, European Union experts said in a report, a sign of the uphill struggle the country faces as it tries to get its deficit reduction plans back on track.

The report, prepared by European Commission budget experts with input from European Central Bank officials and published over the weekend, says that Greece could miss its June target for its primary budget balance, a measure of the government deficit that excludes interest payments on outstanding debt.

Government revenue faces "significant" shortfalls that have only partially been offset by lower spending and delayed payments, the report says. "As a result, the quarterly performance criterion on the primary balance could be missed already in June."
Spoon Feeding will Continue Regardless of Shortfalls

Short of telling the ECB, EU, and IMF to go to hell, nothing will stop the Plan to Spoon-Feed Greece to Death
The original bailout was 110 billion Euros, now it takes another $85 billion (and counting). When the fire sale of Greek assets does not bring in enough money, the banks and IMF will place even harsher terms on Greece.

Notice the plan to spoon-feed payments to Greece in 12 billion-euro bites while demanding "progress". This will ensure Greece is sucked dry (at fire sale prices) of any government assets worth owning by the time the "bailout" is over.

Portugal, and Ireland should make note of the process. The same "bailout" plan will be used on them unless they tell the IMF and EU to go to hell.
French Plan to "Save Greece" Constitutes Default

The New York Times reports S.&P. Warns Bank Plan Would Cause Greek Default
Greece risks being judged in default on its debt obligations if banks are forced to bear part of the pain, Standard & Poor’s said Monday, suggesting that current proposals for rescuing the euro zone’s weakest member may have to be reconsidered.

In particular, a plan proposed by the French government and banks “could require private sector debt restructuring in a form that we would view as an effective default,” S.&P. said in a statement.

The rating agency also said it was cutting its long-term rating on Greece three notches deeper into junk territory, to CCC from B.

A finding by the credit ratings agencies of default would also require the E.C.B. to impose discounts, known as haircuts, on the Greek debt it has accepted as collateral. That would inflict more financial pain on banks holding that debt.

Euro-zone finance ministers agreed over the weekend to provide Athens with financing of €8.7 billion, or $12.6 billion, from the €110 billion bailout agreed to last year, to help the Greek government function through the summer. The new aid eliminates the prospect of a near-term default.

But the finance ministers put off the question of how to provide a second bailout, reportedly valued at up to €90 billion, to keep the country operating through 2014, when it is hoped that Greece will be able to return to the credit markets.

Nicolas Sarkozy, the French president, announced June 27 that French banks had agreed to a plan under which the banks would reinvest most of the proceeds of their holdings of Greek debt maturing between now and 2014 back into new long-term Greek securities.

But Standard & Poor’s said Monday that it “views certain types of debt exchanges and similar restructurings as equivalent to a payment default”: when a transaction is seen as “distressed rather than purely opportunistic” and when it results “in investors receiving less value than the promise of the original securities.”

Both conditions would appear to be met by the French proposal, it said.
Rating Agency Rollover Default Conditions

  1. It's a default if rollovers are distressed rather that opportunistic.
  2. It's a default if "investors receiving less value than the promise of the original securities”

Point number one deals with the "voluntary" nature of the dealing. If banks roll over debt under duress, fearing bigger losses if they don't, the rating agencies will not consider that a "voluntary" rollover.

Even if a voluntary rollover can be constructed, condition number two must still be satisfied. I fail to see how that is possible, at least without destroying Greece.

Making Sense of the French Rollover Plan

There is a nice article on Zero Hedge by Peter Tchir of TF Market Advisors called Making Sense of the French Rollover Plan
The French proposal is slightly complex at best and convoluted at worst. Before digging into the specifics, let’s look at what a true rollover would look like. If Participants agreed with Greece to extend the maturity AND reduce the coupon AND do it immediately, that would be a clear example of a rollover that benefited Greece.

There are 3 key elements to a real rollover. The first is that they would agree to the rollover now. That would take away uncertainty. The maturity extension is the rollover, and the longer it is delayed, the better for Greece. The coupon on the new debt should be lower than the coupon Greece is currently paying. If all 3 of these criteria are met, and the new bonds are pari passu with the existing bonds, then I think everyone would agree that Greece benefits, the Troika would benefit, and the Participants would have made a sacrifice.
We need to stop right there. What Tchir says is true, but since when is the plan to benefit Greece? Moreover, even if the plan was to benefit Greece, notice the key phrase "the Participants would have made a sacrifice. "

A sacrifice implies "investors receive less value than the promise of the original securities”. That in turn implies default, at least to the rating agencies.

Tchir continues ...
The French proposal, as we will see, potentially does not satisfy any of the 3 aspects listed – it is not immediate, the coupon will be higher than existing debt, and the maturity extension is linked to taking some debt out of the market, so it’s not as clearly a benefit as the headlines make it seem.

The ISDA credit derivative definitions for a Restructuring Credit Event have to meet 2 tests. The first part of the test is straightforward and is met if bonds are extended, or the coupon is reduced, for example. This condition would be met. The second condition is effectively that it is involuntary. If the actions of some bondholders can force other bondholders into an agreement then this condition would be met and there would be a CDS Credit Event. In the case of Greek bonds, that looks unlikely. I have only looked at the offering circulars from a couple of bonds, but there does not appear to by anything that could force a bondholder to change the terms of the debt. There is no reason, that on a €1 billion issue, €950 million could be exchanged and €50 million could remain outstanding. If that is the case, then there would be no CDS Credit Event under this true rollover.
The rating agencies have taken the position (right or wrong), that if a rollover is done under duress, the rollover is not voluntary.

However, Tchir goes on to say "The Rating Agencies can be largely ignored".

The plan as it stands is complicated. Tchir does his best to explain it by comparing the rollover to 30 year mortgages.
The Participants are not lending to Greece for 30 years, the duration is much shorter, and the coupon payments start out potentially high, and become usurious in the later years.

The structure is designed in a such a way to make it look like the Participants are being helpful – 30 years at a low coupon, but separating the SPV into its zero coupon component and the loan to Greece clearly demonstrate that the terms being offered to Greece are far worse than the headlines that the Participants are selling to the public.

I would be surprised if Greece agrees to the loan terms as included in the French proposal and wonder if they have even been consulted?
Greece has had no say in this for the simple reason the plan is not to save Greece, but rather save the French banks who are most on hook should Greece default.

It will be interesting to see if the plan changes now that the S&P has warned the French plan for Greece constitute default. Even if the plan is modified, I do not see how it can be modified to meet the "voluntary" rollover criteria of the rating agencies.

Unless Tchir is correct that the rating agencies truly are irrelevant, something has to give.

Actually, something has to give anyway. The situation in Greece is so dire, and the economy, politics and riots so messy that Greece is going to default sooner or later anyway.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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