Limits of Voluntary Deal Hit as Greek Bondholders Draw Line in the Sand; Separating Fact from Fiction in Selective Reporting

The bickering over a half percentage point reduction on the discount rate continued over the weekend as Greek Bondholders Draw Line in the Sand

Private owners of Greek debt have made their “maximum” offer for the losses they are willing to accept, the bondholders’ lead negotiator has said, implying that any further demands could kill off a “voluntary” deal and trigger a default.

One banker said Friday’s demand by official creditors, led by the International Monetary Fund, for a further interest rate cut of 50 basis points on new long-term bonds to be swapped for existing Greek debt “may have put a voluntary deal out of reach”.

Mr Dallara said the IIF’s position tabled with Greek authorities on Friday night – believed to include a loss of 65-70 per cent on current Greek bonds’ long-term value – was as far as his side was likely to go.

“I think it's clear we are at the limits of a voluntary deal,” Mr Dallara said, recalling that eurozone heads of state had committed to keeping the restructuring voluntary at a high-stakes EU summit in October. “It is clear to me we are at a crossroads.”

The IMF wants to put Greece on a path for a debt-to-GDP ratio of 120 percent by 2020. Anyone remember the original proposal a year or so ago? The idea then was austerity measures would put Greece at an 80 percent debt-to-GDP ratio by 2013-2014.

That Fantasyland proposal was soon followed by haircuts of 21% on Greek debt which I said would not work, then 50% which I said would not work, and now 65-70% which once again I suggest will not work.

Greece is in a depression and things are going to get worse. Portugal and Spain are also in depressions.

Ambrose Evans-Pritchard thinks Italy is headed for depression as well. Please see Money Supply Figures Suggests Italy Headed Into Depression; Non-Performing Spanish Loans Hit 134 Billion Euros, 7.51% of All Loans, Highest in 17 Years; Eurozone Unemployment Charts for a discussion.

Granted, 2020 is a long way off, but recall the Maastricht Treaty requires a debt-to-GDP ratio of no more than 60%.

European Debt-to-GDP Ratios

CNN has a nice interactive map of European Public Debt at a Glance.

Germany, France, Belgium, Italy, Portugal, Ireland, Spain, and Greece are all in violation. In fact, 13 out of 17 nations are in violation of the treaty. Estonia, Slovenia, Finland, and Luxembourg are the only exceptions.

The map is from 2010 and some countries such as Spain that were on the edge before are no longer on the edge.

Greek Talks Hit a Snag Over Rates

The New York Times reports Greek Talks Hit a Snag Over Rates

Greece’s private creditors, which hold about 206 billion euros, or $265 billion, in Greek bonds, are resisting accepting a lower rate. They argue that they are already faced with a 50 percent loss on their existing bonds and that the lower rate would increase the hit they would take.

It would also make it more difficult to describe the deal as voluntary. A coercive deal, bankers warned, could lead to a technical default and the initiation of credit-default swaps, or insurance, an outcome that all sides were trying to avoid.

[Mish: No - not ALL sides are trying to avoid that]

With the Greek economy forecast to shrink by 6 percent this year and 3 percent next year, the ultimate goal of Greece’s lowering debt to 120 percent of gross domestic product by 2020 is seeming more and more unrealistic. With G.D.P. plummeting, the International Monetary Fund is insisting that Greece’s debt load — currently 160 percent of G.D.P. — be reduced more quickly and that the private sector pay its fair share.

A majority of the funds the monetary fund has disbursed so far has been paid out to Greece’s bondholders as opposed to helping Greece itself. Of the close to 20 billion euros that the fund has disbursed, two-thirds has gone to repay bondholders — an increasing number of which have been hedge funds betting that this trend will continue.

CDS Holders Have Vested interest in a "Credit Event" Not a Deal

Hedge funds that have plowed into Greek debt did so with credit default swaps. Those CDS holders would be made whole on any "credit event".

They have no vested interest in reaching a deal. So not "all" sides want to reach a deal as stated in the article.

Other creditors are upset that the ECB itself will not partake in haircuts. The ECB holds 55 billion of the 206 billion euros of Greek debt. The rest of the EMU according to fixed percentages are on the hook for that debt.

The Times reports ...

The [ECB's] refusal to take a loss has been regularly cited by investors as unfair, and many have said that they will sue Greece if they have to take a loss while the bank does not.

To get around this, officials are now discussing the possibility that Europe’s rescue fund might lend money to Greece to allow it to buy the bonds back from the European Central Bank at the price the bank paid for them — thought to be about 75 cents on the euro. The central bank would then not have to take a loss on these holdings. By selling them back to Greece, it would remove itself as an obstacle to a broad restructuring agreement.

Separating Fact from Fiction in Selective Reporting

The proposal is for the ECB to sell its bonds back to Greece so that Greece will then take a hit.

With that in mind, look at this preposterous claim by a senior official "The bonds’ rate “is the only issue,” said a senior official directly involved in the negotiations. “We have to accommodate the needs of the Greek economy."

I see two sentences and two lies. Indeed the entire article is crammed pack with lies made by various IIF and EMU officials.

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