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Tuesday, March 20, 2012 2:59 AM


IMF and ECB Bailouts "Created" Huge Bondholder Losses; More Haircuts Coming Up


It's hard to have too much sympathy for those buying Greek bonds. Then again, one should always want a fair market, not a rigged one in which certain players can never lose.

Please consider the question How much did the IMF, ECB and EU bailouts harm Greek bondholders?

The Greek CDS auction results are in, and the implied recovery rate on the Greek bond swap is 21.5 percent – so a 78.5 percent loss. What isn't widely appreciated is that most of this loss was created by the bailouts. That is of course true in the sense that the Greek bailouts have delayed the process of adjustment in Greece, so it continued on an unsustainable path for longer meaning its eventual defaults are larger.

And no one thinks the new situation is really sustainable – new Greek bonds are pricing in of order a 75 per cent further write-down. But that's not what I'm referring to here. I mean something much simpler: because Greece was bailed out with loans from the IMF, ECB and EU that have been treated as senior to the bonds of the private sector (i.e. any losses were to be experienced first by the private sector – all loans to the IMF, ECB and EU were to be repaid with a higher priority than loans to the private sector), that meant that the losses to those Greek private sector bondholders that ended up taking losses were much greater.

The bailouts mean that those bondholders that eventually take losses take a 75 per cent loss rather than a 33 per cent loss – they are badly harmed by the bailout process. Anyone with bonds in another eurozone state in receipt of bailouts had better beware. Portugal, anyone?
More Haircuts Coming Up

The market is already predicting another 75% collapse in Greek bonds. Ultimately any fools that threw money at Greece (without CDS protection) will lose every cent, except of course the idiots who insisted on the bailouts in the first place: the ECB and IMF.

Portugal is now in the batter's box and Spain is on deck. Both will fail, just as Greece did. The only thing that remains to be seen is how much money the ECB throws at those problems before both blow up in the ECB's face.

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