The Restaurant at the end of the World. Bang or Whimper?

"Are you going to tell me," said Arthur, "that I shouldn't have green salad?"

"Well," said the animal, "I know many vegetables that are very clear on that point. Which is why it was eventually decided to cut through the whole tangled problem and breed an animal that actually wanted to be eaten and was capable of saying so clearly and distinctly. And here I am." …….

"A very wise choice, sir, if I may say so. Very good," it said, "I'll just nip off and shoot myself."

 (D.Adams, The restaurant at the end of the Universe)

Douglas Adams the writer of the Hitchhikers Guide to Galaxy, in his science fiction book the “The Restaurant at the End of the Universe”, has a wonderfully surreal scene. Guests at the restaurant are asked to choose which parts from a live animal they wish to eat, while watching the end of the Universe. The animal voluntarily wants to be eaten.

ECB Accounting of its SMP holdings (Greek Bonds etc)

There seems to be a lot of confusion regarding to how the ECB accounts for its Securities Markets Program (SMP) holdings. The reason it matters is because if the ECB is to participate in the PSI restructuring it would have to take a loss. And depending on how big the loss is, it would need to either ask its shareholders for a capital increase or absorb the losses.

SMP is recorder in the ECB balance sheet under item 7.1. Currently it stands at 282billion. Market wisdom has it that around 45-55billion are Greek bonds that were bought during the futile attempts in 2010 to stabilise the market. One could guess-estimate that the average price the ECB paid for these Greek bonds is in the range of 75-85%. It is also widely believed that most of the purchases were near maturities, namely mostly up to 2013-14, but this is not confirmed. We also do not know if any of the proceeds of the already matured bonds were reinvested into other Greek bonds or not.

Europe must relieve ECB before the PSI

The ECB helped Europe in its hour of need. Now it is time for Europe to return the favour to the ECB.

This is crunch time for Europe, Greece and the ECB. The PSI has reached an impasse not because the coupons demanded by bondholders are too high but because bondholders can afford to Free Ride along the ECB.

By insisting on a voluntary PSI with the largest bondholder the ECB, exempted, a huge free riding problem has been created. This more than anything else (coupon, English law etc) is the major obstacle for a successful PSI. Europe must come up with the money to take the Greek holdings out of the ECB’s SMP program NOW. It would do it anyway at some point in time. Let us see why:

• ECB stays out, the PSI proceeds in a voluntary manner. Greece would have to find the money to repay fully this 45-55billion. This probably means the EU (Germany) providing new loans to cover these redemptions in the next 3years (market believes that the ECB holdings concentrate in the near maturities).
• ECB participates in the PSI and takes the losses. Then, barring magic tricks, the National Central Banks (ECB shareholders: Germany 19%, France 14%, Italy 12.5%) would have to cover the losses.
• Greece default through the use of CAC’s or otherwise. The ECB would have to write down the value of the Greek bonds again. Therefore shareholders pay again.

The PSI’s enigma—and a possible solution

The highly respected Greek Economists for Reform group published today an article of mine.

Read the rest on Greek Economist for Reform or below:


The Greek government is currently preoccupied with solving the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU, which is necessary to pay the bond maturing in March. Failing this and in absence of an alternative it would be very hard for Greece to avoid a disorderly default with unpredictable consequences both for Greece and the rest of Europe. This article, written by guest contributor Andreas Koutras, briefly reviews the decisions and history that led to the current impasse. It further proposes a modification to the PSI that could significantly improve the chances of success and could also give Greece the necessary breathing space to effect economic change. The proposal is within the realms of the EU council’s decisions and involves the voluntary sell back by the ECB of its holdings at cost and adding the option for private bondholders to exchange their holding for cash. This would greatly increase the probability of a successful PSI without endangering the government bond markets or risk contagion and default.


The full article of A. Koutras:
The Greek government is currently preoccupied with the solution to the PSI (Private Sector Involvement) enigma. Bringing the PSI to fruition is a precondition for receiving the next tranche of bailout funds from the EU which is necessary to pay its March bond if it is to avoid a disorderly default.
Historical context
Back in July 2011 the European Council took the decision to share the burden of the Greek bailout with the private sector (as opposed to the official sector i.e. ECB and Sovereigns). This was not surprising at all. The majority of the private investors are institutional investors with well remunerated professional experts and risk analysts. Their investment decision was taken after considering the risks of non-payment. There are very few innocent retail investors with Greek bonds (around 5% or 10billion in total). Thus, it is only natural for them to bear some of the pain of their decisions.  One however, could argue against this line of reasoning; Greece misinform them of the true risks, as it provided wrong debt and deficits statistics and engaged in debt beautification practices for many years (as far as I know, no one has taken Greece to court for this).  Incidentally, this is a much stronger argument than the one supporting the ludicrous odious debt case.
In all debt restructurings, the practice of burden sharing and of joint workouts is standard and Greece is no exception. When borrowers find themselves in hard times they negotiate with their creditors to find an acceptable solution. What made the EU council decision rather exotic is that it insisted on a voluntary workout, with the ECB being exempted from any burden sharing. The EU insisted on a “voluntary” workout because it was told (correctly) that any coercive restructuring or workout would be an event of default. And European politicians wanted to avoid a default at any cost. Their insistence had more to do with the stigma of being a failure and their abhorrence of rewarding the free market (CDS speculators) rather than any hard logic or financial rationale.  But perhaps the factor that was paramount in the minds of many politicians was the taxpayer funding of the bailout. Greece no longer had the sympathy of the average European taxpayer who was effectively paying for Greece’s bailouts. Spending more taxpayer’s money became politically unacceptable and a solution had to be found with the right connotations. In the words of Commissioner Olie Rehn, “We all know what to do, we just don’t know how to do it and get re-elected”. Thus the PSI was born. The EU council’s decision on the PSI could therefore be reworded as follows:
We invite the private bondholders to voluntarily reduce their wealth for the benefit of the common good (us politicians becoming electable again). If you do not wish to participate we would not coerce you or punish you and by the way the largest holder of Greek bonds the ECB would not take part in this wealth reduction.

Greek CAC’s Devil’s Advocate (Advocatus Diaboli)

The practice of Devil’s advocate goes back many centuries. The origin of the term comes from the Canonization process of the Catholic Church. The church appoints a God’s advocate (Advocatus Dei) that argues in favour of the Canonization and a Devil’s Advocate who promotes the sceptical view. Most recently (2002), Christopher Hitchens played the Devil’s advocate in the Canonization of Mother Teresa. He, by the way, argued that she is fanatic, fundamentalist and a fraud who is responsible for more misery and deaths in India due to her stubbornness in promoting hardship and punishment often resulting in death rather than the emancipation of women.

Jumping forward 10 years, Greece is considering introducing Collective Action Clauses (CAC) in the Bonds under Greek law in order to force a higher participation in the PSI restructuring process. We have argued against this action repeatedly (see previous Notes, and posts). We present a hypothetical exchange between the Devil’s advocate (A.Diaboli, Bondholders) and God’s Advocate (A.Dei, Hellenic.Republic).

Greece on the CAC Warpath.

 According to newspaper reports Greece is one step away from introducing CAC in the bonds under Greek law. In this note we try to investigate some of the possible ramification of this action for both Greece and Europe. If you believe that introducing and activating the CAC’s is a way to punish the bad guys read on. 

Let me start by saying that the legal opinion of many is that introducing a law imposing retroactively CAC’s may be worded in such a way so as not to be an event of default. For the sake of the argument let us accept that premise. i.e. it can be done without causing too much trouble to begin with. On the question of the activation however the majority of the legal observers, agree that this would be an event of default. So what! Say some. Let it be a credit event and triggering of the CDS. Here is a hypothetical sequence of events: 

GGB4.3% 20th March 2012, Pencil the Bond and the Date.

 The 20^th of March is a rather unimpressive day for most of us. Few events of global significance have happened on that day, among them the start of the Iraqi war in 2003, and the publication of Einstein’s General Theory of Relativity (a personal favorite). Yet it tortures the minds of most traders and politicians in Europe for another reason. It is when Greece has to repay 14.4billion Euro to the holders of the 3Y bond with ISIN GR0110021236 (identification number). Out of the 33billion that Greece has to repay in 2012 the March12 represents the largest chunk and it is the first bond to be paid (or not) after the so-called PSI is being completed.

In this note we examine the reasons this bond has attain such significance and what are the possible scenarios.

Greece Imposing Losses Would Likely Be Credit Event, ITC Says

Greece Imposing Losses Would Likely Be Credit Event, ITC Says
2012-01-10 08:02:48.19 GMT


     (For more on the euro crisis, click on {EXT4 <GO>})

By John Glover and Abigail Moses
     Jan. 10 (Bloomberg) -- Imposing losses on Greek bondholders holding out against a debt restructuring would allow buyers of credit-default swap protection to demand payment, according to Andreas Koutras of research firm ITC Markets.
     The Greek government plans to insert so-called collective action clauses into its bond documentation, allowing bondholders to force holdouts to accept the same terms as the majority, Dow Jones Newswires reported yesterday. The report cited an unnamed person with the Troika, as the delegation representing the International Monetary Fund, the European Union and the European Central Bank is known.

Questions and Feedback on the PSI proposal

I have received a lot of constructive feedback on the PSI proposal. (Read Dr Lambropoulos article in Euro2day.gr) Many market participants raised questions regarding the proposal. In this sort post I clarify some of the questions I and possibly misunderstandings:

1.   I am NOT proposing for Greece to offer to buy back the Greek bonds. It is NOT a tender offer to buy the bonds at a price or a Dutch auction process. 
2.  Greece would NOT go into the secondary market and bid for the bonds. It would be imprudent to do so as it would immediately lift the prices. 
3.  The proposal is simple. Just add to the current PSI the option to pay 30% (say) and destroy the bonds. Bondholders who wish to participate into the voluntary PSI would have the option to either get 30% (say) and get out of Greek risk altogether or get a new 30Y Greek bond (plus some cash upfront). 
4.  The proposal also calls for the ECB to sell voluntary their holdings back to the issuer (Greece) at 70% (it could be 80% or the level that minimises ECB losses). 
5.  The different prices between the Private and the Official sector does not present a legal problem as this is a voluntary sell by the bondholders to the issuer and not a differential tender offer. 
6.  There is no need for a new EU council decision. The proposal is within the PSI process. It just adds another option for the bondholders to consider. Only the total amount would need to be updated. 
7.  Where would Greece find the money? Answer: Once bondholders agree to sell their bonds the EFSF could issue a T-bill with maturities of 3,6,9,12,15 months (for example) to exchange the Greek bond with and spread the raising of the requisite 120billion over time. 
8.  Doesn’t this proposal introduce moral hazard? In other words, Greece is off the hook and able to repeat the same ruinous policies as before? Answer: As it stands Greece would get 89billion once the PSI is completed. So obviously, this is not a major concern for policy makers. In addition, even after the completion the Greek Banks would still depend for their funding and recapitalization to Europe. Moreover, the strict conditionality already imposed onto the Greek government would probably suffice. 
9.  What is going to happen to the Free Riders? Answer: Once the ECB is taken out, then only the bravest of the brave would remain as free riders. Most likely, holders of very near maturities. This is a classic game theory problem. If too many hold out then Greece could make the threat of CAC’s or default real and thus force them. If on the other hand too few remain, then Greece may decide to leave them rather than cause credit event. This is the same problem that the original PSI is facing. By adding the full cash option (at 30%) and by taking the ECB out the PSI maximizes the participation. 
10.  Would the addition of the cash option push the prices up? Answer: Once the option is announced prices would probably move close to the cash offer. In other words prices much lower than 30% would probably converge as investors buy them (say at 20) to sell them back at 30. 
11.  The proposal would not cause a credit event as it is part of the voluntary PSI. Greece would most probably be placed under “Selective Default” for the time period till completion.

 Hope this helps to clear up some of the misunderstandings.

Bloomberg News. Greece Bond Plunge Makes Buyback Option Realistic, ITC Says

Greece Bond Plunge Makes Buyback Option Realistic, ITC Says
2012-01-09 12:04:08.790 GMT


By John Glover
     Jan. 9 (Bloomberg) -- Greek government bonds have fallen sufficiently for a buyback to offer a realistic prospect of
wiping out a meaningful amount of debt at an acceptable price, according to research group ITC Markets.
     A buyback has been under consideration as part of Greece’s second bailout, according to a European Union planning document obtained by Bloomberg News in September. Greek two-year bonds, currently quoted at about 28 percent of face value, were then at 40 percent of par, while the nation’s 10-year debt has declined to 20 percent from 30 percent of nominal value.
     Negotiations between Greece and its creditors on a voluntary bond swap designed to reduce the nation’s debt burden
have stalled amid disagreements on the terms of the transaction, according to a report by Der Spiegel. A voluntary buyback at an agreed price alongside the exchange would simplify matters and offers advantages to both Greece and its creditors, according to Andreas Koutras at ITC.

Orphanides of the ECB says drop PSI

In an article published by the FT and also ekathimerini, Governing council member Prof Orphanides claims that the PSI should be abandoned. We posted the Abandon the PSI. Buyback Instead a month ago on the 6th of December.

Alternative Proposal within the Framework of PSI that is beneficial to Europe, Bondholders, ECB and Greece

Sustainable Solution for Europe and Greece

The “official” punishment of the Bondholders is not in the interest of Europe and is not in beneficial to Greece. Markets punish more efficiently and faster.

The restructuring of the Greek debt should aim at: 

1. Exit Yield. The yield that Greek bonds would be trading after the restructuring 
2. The exit rating. The rating of Greek debt after the restructuring. 
3. Sustainability of the Greek finances after the restructuring

·         In its current form the PSI+ does not fulfil these three essential aims. Either because the bondholders demand high coupons or because there are many hold outs risking the voluntary participation rate.

·         Greece would need to borrow again to pay the coupons of the new bonds as it is still runs a primary deficit of 2%. Paying on average a 5% coupon would require another 3% of GDP.

·         Adding the request that the new bonds to be under English law and the exclusion of the ECB from this process complicates and endangers its success.

Εναλλακτική πρόταση εντός των πλαισίων του PSI με σημαντικά πλεονεκτήματα για την Ελλάδα. (Ενημερωμενο)

Αναδημοσιεύτηκε στο Κέρδος
Αναδημοσιεύτηκε στο Reporter.gr
Η τιμωρία των ομολογιούχων από την Ελλάδα δεν πρέπει να είναι ο στόχος και ούτε είναι προς όφελός της Ελλάδος. Η Ελλάδα πρέπει να ενδιαφέρεται μόνο για τρία πράγματα.

1. Επιτόκιο εξόδου. Δηλαδή η απόδοση με την οποία θα διαπραγματεύονται μετά την αναδιάρθρωση.
2. Πιστοληπτική αναβάθμιση μετά την αναδιάρθρωση.
3. Βιωσιμότητα του χρέους μετά την αναδιάρθρωση.

Δυστυχώς, το PSI+ με την σημερινή του μορφή δεν πληρεί τους τρεις αυτούς στόχους. Και τούτο, διότι οι ομολογιούχοι απαιτούν υψηλά τοκομερίδια καθιστώντας την βιωσιμότητα και το επιτόκιο εξόδου προβληματικό. Η Ελλάδα θα χρειαστεί να δανειστεί ξανά για να πληρώσει τα νέα τοκομερίδια. Προσθέτοντας την αλλαγή σε Αγγλικό δίκαιο και τις εγγυήσεις από το EFSF, τότε έχουμε ένα πραγματικό γόρδιο δεσμό.