Countdown to PSI’s Paradox

The Greek FM Mr Venizelos announced that the PSI talks are close to completion. This is not the first time. On numerous occasions a PSI deal was announced as imminent. This reminds me of Zeno’s Paradox. Every day we run half the distance to the PSI completion, but we never get there. There is however a deadline that many see as immovable, the 20^th March 2012. This is the date that the GGB4.3% needs to be repaid, all 14.4billion of it. Working backwards from that date, we have the following tentative schedule:

·         Around one week may be needed to administer and settle the new Greek PSI Bonds. Even this may be optimistic. Also the funds need to be disbursed by the EZ.

·         Once the PSI is finalised, there should be at least two weeks for the offer and to gather up any interest.

So, assuming everything goes to plan and participation is very high, the PSI would need to be in place by the end of February (Friday 24^th of February).

If on the other hand, it does not go according to plan and participation is low, then a decision needs to be taken on whether to introduce and activate CAC’s.  Greece could in principle pass the law any time in the next 7 days or by the 10^th of February  (Friday). But activating the CAC also requires a meeting of the bondholders with the necessary majority. This may actually take another week. So, if there is a need for coercive restructuring the PSI must at least be done before the 17^th February. In the case of a coercive restructuring followed by a credit event, the EZ must have in place contingency plans for possible contagion. The next 3Y LTRO is on the 29^th February (Leap year) and it may fall right in the middle of the PSI messy offer.

Timing wise, this is a rather restrictive schedule as it leaves very little room for errors or unforeseen events. Markets should be prepared for a rough ride in the next few weeks.

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.

Collective Action Clause, Ρῆτρες Συλλογικῆς Δράσης

Collective Action Clauses (CAC’s henceforth) or Majority Action Clause have a long and varied history. According to Buchheit & Gulati[1] they were first introduced in English law by Palmer (1879). Their introduction served and serves a very real purpose and need. That of facilitating the restructuring or the amendment the (T)erms & (C)onditions of a Bond by the majority of Noteholders and to avoid rogue or malevolent holders of bonds holding at ransom both the debtor and other creditors.  What are CAC’s (see Appendix for an example) and what purpose do they serve?  Let me start with an example of how it might work.

Suppose that ACME a company that manufactures futuristic technology gadgets finds itself in the position of having a severe cashflow problem as one of its major clients Mr W.E.Coyote has not paid in time. ACME is unable to pay its bond liabilities at the agreed time. Consider further that most bondholders believe, after careful analysis of ACME’s product range, that the main business is sound and given time and perhaps some reorganization of the company’s management and client focus ACME would thrive and pay in full its bond liabilities. All that it needs is to amend some of the T&C of the bond, perhaps extend the maturity or move some coupons in the future and ACME would survive. One bondholder, Mrs R.Runner for reasons of personal benefit or other, things differently. When ACME got into trouble Mrs Runner bought some of the bonds at discount with a view to either force ACME into liquidation or force a management change or simply to extract more money. Mrs Runner can do so since ACME bonds need the consent of 100% of Noteholders as there are no CAC’s that allow for the will of the majority to prevail. If on the other hand, ACME bonds included right from the start CAC’s specifying that a 75% majority is binding for all bondholders Mrs Runner would have needed at least 25% of the outstanding ACME bonds to see her sinister plans materialize.

Happy Birthday to Mithras

The date of December 25th probably originated with the ancient "birthday" of the son-god, Mithra, a pagan deity whose religious influence became widespread in the Roman Empire during the first few centuries A.D. Mithra was related to the Semitic sun-god, Shamash, and his worship spread throughout Asia to Europe where he was called Deus Sol Invictus Mithras. Rome was well-known for absorbing the pagan religions and rituals of its widespread empire. As such, Rome converted this pagan legacy to a celebration of the god, Saturn, and the rebirth of the sun god during the winter solstice period. The winter holiday became known as Saturnalia and began the week prior to December 25th. The festival was characterized by gift-giving, feasting, singing and downright debauchery, as the priests of Saturn carried wreaths of evergreen boughs in procession throughout the Roman temples.

Εγκαταλείψτε το PSI+

Άρθρο στην Ημερησία.

Η Ελληνική κυβέρνηση φαίνεται ότι έχει ήδη στείλει το γράμμα της στον Αϊ-Βασίλη. Θέλει PSI και τίποτα άλλο. Η αγορά όμως λέει κάτι διαφορετικό. Η αρχική συμφωνία του PSI προέβλεπε ένα «κούρεμα» της τάξεως του 21% στην καθαρή παρούσα αξία. Από την αρχή είχαμε τονίσει πως η συμφωνία δεν ήταν επωφελής για την Ελλάδα («Ημερησία», 30 Ιουλίου του 2011).

Στην πραγματικότητα όμως, η λογική του PSI+ ήταν και είναι λανθασμένη. Για το λόγο αυτό εγκαταλείφθηκε από τους Ευρωπαίους. Είναι μυστήριο γιατί επιμένουν στην εφαρμογή του για την Ελλάδα. Ίσως γιατί δεν έχουν το χρόνο να ασχοληθούν μαζί μας και ίσως γιατί και η ελληνική κυβέρνηση δεν ασχολείται με το θέμα σοβαρά. Η καινούρια όμως συμφωνία κατόρθωσε να είναι δυσμενής και για την Ελλάδα αλλά και για τους ομολογιούχους.
Η αναδιάρθρωση χρέους είναι μία εξαιρετικά λεπτή διαδικασία έχοντας και την επιπρόσθετη εμπλοκή της δήθεν εθελοντικής διαδικασίας. Τα ομόλογα διαπραγματεύονται γύρω στο 25%-40% και πάρα πολλές ευρωπαϊκές τράπεζες τα έχουν ήδη εγγράψει κοντά σε αυτές τις τιμές έχοντας απορροφήσει μεγάλο μέρος της ζημιάς. Το PSI, τους καλεί να τα ανταλλάξουν με νέα, που θα έχουν περίπου την ίδια αξία με αυτήν που έχουν τιμολογήσει στο χαρτοφυλάκιό τους. Εάν όμως δεν συμμετάσχουν στο PSI, ενδέχεται να πάρουν 100 σε περίπτωση που αποφευχθεί η χρεοκοπία. Σε περίπτωση που η Ελλάδα χρεοκοπήσει και τυπικά, θα πάρουν πάλι κοντά στο 30% (υπόθεση). Άρα η λογική των τραπεζιτών, λέει ότι είναι καλύτερα εκτός PSI, παρά εντός, παρέα με την ΕΚΤ (45 δισ.).
Το PSI δεν είναι η καλύτερη λύση για την Ελλάδα στις σημερινές συνθήκες της αγοράς. Η αρχική ιδέα των Γερμανών ήταν η τιμωρία των ιδιωτών ομολογιούχων και η μείωση του χρέους. Η τιμωρία όμως των ομολογιούχων από την Ελλάδα δεν πρέπει να είναι ο στόχος και ούτε είναι προς όφελος της Ελλάδας. 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 τη σημερινή του μορφή δεν πληροί τους τρεις αυτούς στόχους. Και τούτο, διότι οι ομολογιούχοι απαιτούν υψηλά τοκομερίδια καθιστώντας τη 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. Το τραγελαφικό στην όλη υπόθεση είναι πως οι Ευρωπαίοι εμπιστεύονται και επιζητούν την προστασία του αγγλικού δικαίου αντί κάποιου άλλου. Μόνη εναλλακτική λύση η «εθελοντική» προσφορά επαναγοράς.
Υπάρχει όμως εναλλακτική λύση στο PSI. Πολύ απλά να δώσουμε 35% (περίπου) και να επαναγοράσουμε τα χρέος μας. Ούτως ή άλλως οι μόνοι που θα συμμετάσχουν στο PSI είναι όσοι πιεστούν από ευρωπαϊκές κυβερνήσεις. Αντί λοιπόν να ανταλλάξουμε τα παλιά με τα καινούρια ομόλογα κάνουμε «εθελοντική» προσφορά στο 35%. Τα προτερήματα αυτής της λύσης είναι:
Το χρέος μειώνεται στο 120% του ΑΕΠ από την πρώτη κιόλας μέρα. (15% αποχή από τη διαδικασία και με την ΕΚΤ να πάρει 70% της ονομαστικής).
Η Ελλάδα δεν πληρώνει τόκους και χρεολύσια για 10 χρόνια που είναι η περίοδος χάριτος των δανείων μας.
Η Ελλάδα δεν θα χρειαστεί να αποδεχθεί το αγγλικό δίκαιο στα ομόλογα. Μόνο στα διμερή δάνεια προς το EFSF (όπως και τώρα).
Οι ομολογιούχοι παίρνουν ρευστό, δεν θα έχουν άλλες ζημίες και ούτε οι τράπεζες θα είναι αναγκασμένες να κάνουν περαιτέρω προβλέψεις ή διαχείριση ρίσκου. «Τιμωρούνται» δε ακόμα πιο αυστηρά αλλά από την αγορά.
Η Ελλάδα καθαρίζει όλο το στοκ των ομολόγων της. Τα καινούρια ομόλογα θα μπορούν να έχουν ρήτρες συλλογικής δράσης και ό,τι άλλο θέλουμε.
Η Ελλάδα θα βελτιώσει κατά πολύ τη βιωσιμότητα του χρέους της αλλά και την πιστοληπτική της ικανότητα άμεσα.
Αγοράζοντας και καταστρέφοντας τα ομόλογα, απομακρύνεται ο κίνδυνος πιστωτικού γεγονότος από ενεργοποίηση των ρητρών που υπάρχει σε πολλά ομόλογα του ΟΣΕ αλλά και της ελληνικής δημοκρατίας.
Η Ελλάδα θα πάει σε επιλεκτική χρεοκοπία όπως και με το PSI για όσο καιρό ισχύει η προσφορά.
Θα ρωτήσετε όμως, πού θα βρούμε τα λεφτά για την υλοποίηση της εν λόγω λύσης. Χρειάζονται περί τα 105 δισ. ευρώ. Αν υπάρξει συμφωνία με τους κατόχους, τότε τα ομόλογα σε βάθος 12 μηνών θα μπορέσει να τα «σηκώσει» το EFSF.
Συμπέρασμα
Το PSI ήταν πάντα μια κακή επιλογή που προωθήθηκε από πολιτικούς. Η αγορά δίνει όμως πάντα καλύτερες λύσεις και αυτήν τη στιγμή λέει ξεκάθαρα μέσω των τιμών ότι η καλύτερη λύση είναι η προσφορά επαναγοράς και όχι η ανταλλαγή με νέα ελληνικά ομόλογα. Χρειάζονται άμεσα πρωτοβουλίες από την ελληνική πλευρά.

Newton's Notebook from Trinity College, Cambrige

I know that this is not a financial post but as a physicist who studied theory or gravity and Newton I found it very interesting (hat tip to Sotiris). It is Isaac Newton's Notebook from Trinity college, Cambridge. Notice the language!
You can see the rest in Cambridge Digital Library

Should Santa bring PSI to the Greeks?

Letter to Santa,

Dear Santa, I am the Greek government and I know that I have not been a very good child lately. I was placed on the naughty step many times this year for not behaving properly. Despite my parent’s good will and encouragement I did not manage to reduce significantly my addiction to the soviet style state, I did not brake relations with my good friends the unions, or increase my rather poor grades in housekeeping. I also failed to share some of my prized toys and possessions with other kids. I know, “If you do not share (sell) you do not play” but I really can’t. I realised that my finance minister behaved rather impolitely to your representative elves, but he has now learnt who is filling his dog bowl with goodies and realigned his allegiance accordingly.  He realised that our benevolent parents assign the top dog position. Although I cannot claim to have repented in full, I did change the Prime Minister as instructed by our well-meaning parents. I reluctantly formed a unity government consisting of some right wing xenophobic fascists, hysterical nationalists and utopian socialists. Although this is not the ideal, it is the absolute best, the crème de la crème, of the Greek political system. So, please, please, please can I have my PSI for Christmas? I promise to be good going forward.

Signed

Greek Government

Christopher Hitchens dies after long battle with cancer

Today is a very sad day for all who think that logic and rational thought should govern our lives. Christopher Hitchens perhaps the most outstanding polemicist for many generations died of lung cancer.

I am one of the lucky people who first met him through his toxic and sharp writings on Mother Teresa, Kissinger, and God. I also had the pleasure of meeting him in person. On hearing that I was Greek, he started speaking to me in Greek. I learned afterwards that his first wife was Greek Cypriot. His knowledge of global politics was unsurpassed and his ability to quote facts and stories legendary. As Richards Dawkins said of him "If you are invited into a debate with Hitchens, DECLINE". He recently locked swords with ex-PM Tony Blair. You can watch this debate for free for a limited amount of time (hat tip to Manos Markakis). He was a delight despite his illness.

He will be missed but not forgotten. In the future he will for sure be called as one of the leading lights of the new enlightenment. He did  plant many seeds. It is for us to help them grow.

My friend Leo Kolivakis paid tribute to Hitch. 

On Mother Teresa: "[Mother Teresa] was not a friend of the poor. She was a friend of poverty. She said that suffering was a gift from God. She spent her life opposing the only known cure for poverty, which is the empowerment of women and the emancipation of them from a livestock version of compulsory reproduction." 
On Bush: “[George W. Bush] is lucky to be governor of Texas. He is unusually incurious, abnormally unintelligent, amazingly inarticulate, fantastically uncultured, extraordinarily uneducated, and apparently quite proud of all these things.”

Obituary by Vanity Fair
"Farewell, great voice. Great voice of reason, of humanity, of humour. Great voice against cant, against hypocrisy, against obscurantism and pretension, against all tyrants including God. Farewell, great warrior. You were in a foxhole, Hitch, and you did not flinch. Farewell, great example to us all."

Obituary by Telegraph


“[O]wners of dogs will have noticed that, if you provide them with food and water and shelter and affection, they will think you are god. Whereas owners of cats are compelled to realise that, if you provide them with food and water and shelter and affection, they draw the conclusion that they are gods.”  

Reply to Prof. Varoufakis on the occasion of his blog post on the 10th December 2011.

Dear Prof. Varoufakis

Thank you very much for your swift and good natured reply. I am honoured that you took the time to read my critique and the respect you have given it.

Background

About a year ago Prof. Varoufakis and Prof. Holland presented a proposal to solve Europe’s debt crisis. Since then, the so-called Modest Proposal (MP henceforth) has undergone many revisions. The most updated version can be found in here. On the 5^th of December 2011 Andreas Koutras published a Critique of this proposal. Prof. Varoufakis answered these criticisms on the 10^th December 2011 in here. The current paper is the counter answer to Prof. Varoufakis.

 I share Prof. Varoufakis’ view that we need a totally open minded and rational debate about the causes and solutions to Europe’s problems. I would also like to add, that due to the seriousness of the issues, such a debate should be based on facts, evidence and logic rather than beliefs, convictions, political prejudices, groundless assertions or populist commentary. I am the first to admit, that unwittingly, I sometimes fall prey to their attractiveness. Christopher Hitchens, said “What can be asserted without proof can be dismissed without proof” when asked about the existence of God. If we apply this simple principle to every debate we would form a better society and a better future for all of us.

Prof. Varoufakis should be commended for his tireless zeal with which he has undertaken the European cause. I admire his energy and his ability to raise awareness about such important issues. Europe and Greece would be a better place if more people joined this debate and followed his example. Hopefully, this dialogue will show how urgent is the need to find a stable solution to the debt crisis. The EU is our home and it deserves another chance. 

EU Council Decisions. Moving Closer to Feudalism

Europe reminds me, of the famous pregnancy book, “What to Expect when you’re Expecting”.  The book describes eloquently many, if not all, the symptoms that Europe is undergoing; like waddling, drooling, vomiting, forgetfulness, fatigue, nausea, constipation, incontinence plus many others. How else can you describe the path that Europe has taken towards the birth of the new Europe? European Council meetings and Eurogroup or Ecofin gatherings are responsible for most of the credit spread basis points of Italy, Spain Greece and the rest than any hedge fund or trader. Their inability to diagnose the roots of the crisis is only second to their incompetence into finding a solution.  Lets look at latest decisions taken the past couple of days by the EU Council.

ORPHANIDES SAYS ABANDONING PSI IN GREECE MAY RESTORE MKT TRUST

 According to news reports the governor of the Bank of Cyprus and member of the ECB executive council spoke of abandoning PSI. Read the report here

*ORPHANIDES SAYS ABANDONING PSI IN GREECE MAY RESTORE MKT TRUST
2011-12-09 11:06:03.901 GMT

ECB adopts ELA practices, Stealth Quantitative Easing

ECB Decides that it is really a bad bank after all.

The ECB decided on Thursday to:

• Lower the Repo, Marginal and Deposit rate to by 25bp.
• Start a longer-term refinancing operation with a maturity of 36Months putable after 12m. 
• Reduce the reserve ratio from 2% to 1% (Banks would need 100blin less now to cover their regulatory requirements)
• Lowered the collateral rules for ABS (single A, Mortgages and SME’s) and allowing NCB to accept performing loans

Lets look at each of the decisions.

Abandon PSI+. Buyback Instead

This post is also mentioned in Greek (citypress Yannis Paleologos)
 
On the 26^th of October the European leaders pushed the head of the IIF to accept a 50% haircut on the nominal of the Greek bonds. This apparently was done in order to punish the banks that invested carelessly into Greek debt and to reduce the Greek debt burden. The noble aim was to reduce the Greek Debt/GDP to around 120% by 2020.

They also reiterated their resolve in keeping the whole PSI exercise on a voluntary basis. In this note we argue that the size of the haircut may have struck a death blow in the PSI and that now it would be better if Greece was to make a public offer to buy these bonds back at an average of 35% (say) rather than mess with the PSI conundrums.

A Critique on the Modest Proposal of Varoufakis & Holland

About a year ago Prof. Varoufakis and Prof. Holland presented a proposal to solve Europe’s debt crisis. Since then, the so-called Modest Proposal (MP henceforth) has undertaken many revisions. Their claim is that the MP can solve the continents debt woes without any fiscal transfers or treaty changes. The current flavour of their proposal can be found by clicking on the link Varoufakis and has been adopted by the Levy institute. Despite the publicity that the MP has commanded in the press and the relentless marketing efforts of its originators, the MP has not captured the market practitioner’s imagination or the banker’s acceptance. In this note, we analyse parts of the MP and argue that the non-adoption of the proposal may be due to flaws that many would call, detrimental and fatal to the proposal.

Greece could default on PSI negotiations

Back in July 2011 the so called Greek negotiating team made a rather fundamental error when negotiating the original PSI. They engaged into the talks apparently unprepared and with a rather amateurish team. The result was an agreement that was later abandoned and declared dead only to be replaced by another PSI that also seems to be dead too. The Greeks appeared to have made another mistake which only betrays severe incompetence in the matter. They signed a clause that allows countries (Finland) to ask for collateral from Greece as a prerequisite for their financial support. Why was it a mistake? Because there are Greek bonds in existence that specifically prohibit Greece from giving any security unless they do so for everybody. If they do not give this security to everybody, then it would be a breach of the bond's covenants and possibly an "Event of Default". The negotiating team could have said to the Finland team that they cannot possibly give these guarantees as this would be an event of Default, which is something to be avoided and the case would have been closed then and there. That would have been the case of course, if anyone had bothered to read the legal documents that the Hellenic Republic had already signed (see FT  alphaville).The fact that they did not object to it, shows that they had not done their homework going into a meeting that was to shape the country's future. Incidentally, for Bond aficionados the actual clause is called a "Negative Pledge". Let me give you an example from the Greek bond with ISIN XS0256563429.

Click to enlarge

   "So long as any Note remains outstanding, the Republic shall not create or permit to subsist any mortgage, pledge, lien or charge upon any of its present or future revenues, properties or assets to secure any External Indebtedness, unless the Notes shall also be secured by such mortgage, pledge, lien or charge equally and rateably with such External Indebtedness or by such other security as may be approved by an Extraordinary Resolution of the Noteholders (as described in Condition 10)."

So simply by reading the Offerings of the bonds they could have avoided a lot of trouble and the subsequent structuring of a special vehicle to handle this guarantees. Absurdly enough  the Greek side seems to be repeating the mistake! (Τό δίς ἐξαμαρτεῖν οὐκ ἀνδρός σοφοῦ, "To commit the same sin twice is not a sign of a wise man.")

Greece negotiating directly the PSI could be an event of default. 

Click to enlarge

According to many press reports (Kathimerini) Greece has started direct negotiations with the bond holders in order to finalise the haircut and restructuring of their debt. If this is true, then just read the following "Events of Default" from the Greek bond with ISIN FR00489676.
"(l) Moratorium
A general moratorium is declared by the Guarantor in respect of its External Indebtedness or the Guarantor announces its inability to pay its External Indebtedness as it matures or the Guarantor otherwise commences negotiations with one or more of its respective creditors with a view to a general readjustment or rescheduling of its respective indebtedness."

The Guarantor in this case is the Hellenic Republic and the bond was issued by the Hellenic Railways. Interestingly, apart from the Greek lawyers (that may claim ignorance), the international one is a very well known firm, that should have spotted this gross mistake in the Offering.

One could have stretched the argument up until now by claiming that it was the IIF that was doing the negotiations and not Greece directly. This is like hiding behind a fig leaf. But if it is true that Greece is now directly negotiating the "voluntary" restructuring and haircut and it would leave very little room for latent interpretations. Ultimately, it would be up to the English courts to decide how to construe it.

One thing is certain, the market is scrutinizing Greece’s every move and Greece would better square up to it (see FT  alphaville). All one has to do, is to buy few thousands (minimum denomination is 1000) of this bond maturing on 13 September 2012 and go to an English court and declare that Greece has breached the covenants and has therefore defaulted. Apparently it is that easy. I wonder how long it would take before someone does this.

Gambler's Ruin. EU's Gambler's Fallacy.

Leonardo, the 6 year old son of a  colleague of mine when asked what kind of a Christmas present he wants answered "Dada I want a money printing machine so I don't have to ask you for money again". The kid's understanding of money creation is not far off from what most esteemed economists, politicians and journalists have. Many of us have pondered; if it so easy to print money to get out of a financial mess why doesn't everybody doing it? The USA is doing it to the tune of few trillions and Her Majesty's government engaged in quantitative easing (Fancy word for money printing). According to this idea the ECB can print two trillion Euros in order to buy all Greek and Italian debt and bob's your uncle. No more austerity measures, no more hardship or reliance to market forces.

In fact, this is exactly what the central banks of the most advanced countries are doing the past 10 years. They have been doing it in a number of ways not often seen as money printing. In fact the expression money printing is a misnomer as there is no real printing of currency notes in the traditional sense but just the practice of adding few more zeros on the accounts the commercial banks have with the central bank.

Gambler's Ruin

If you have done statistics and probability in college, you have probably come across the example known as Gambler's ruin. If on the other hand, you are a trader or a simple betting man or woman you would have experienced this mathematical concept first hand. Let me explain it with a simple bet:

G.Neous, a gambler, and his friend, John Doe, play a simple coin toss game. G.Neous declares Heads or Tails and a coin is flipped. G.Neous starts with a bet of £100. If he guesses correctly he has won £200, since there is a 50/50 chance in a fair coin toss. If he loses however, he doubles  his bet, in order to recoup his losses and make up some profit.  This strategy is perfect! G.Neous is assured of a profit. As we all intuitively know, at one point in time G.Neous would guess correctly and make a handsome profit.In mathematical language this is expressed by saying that the probability (expectation) of winning is 100%. So where is the catch? The problem is that even though you have 100% probability of success (at some future time) you do not know or have a limit on when this is going to happen. In other words, it can come after 10 coin tosses or after 1000 or even after 1 million coin tosses. This means that you must have infinite amounts of money in order to play this strategy and infinite amounts of time (for biological beings). In mathematical language this is called infinite variance or unbound variance. How many times did a gambler say, "if I only had more money to bet". He knows that eventually he must win, but he runs out of money before that winning bet comes.

This is analogous to what central banks have done the past 11 years. When the internet bubble burst the Fed first and the ECB later lowered their intervention rates. This made the price of money even cheaper. Effectively, they indirectly threw trillions of dollars and euros into the system in order to avoid the recession. This created a real estate bubble. When the real estate and mortgage bubble burst they printed even more money to stop the collapsing and the recession. In the process, they moved the problem from the banks to the sovereigns and now politicians are asking for even more money printing in order to save the peripheral countries. Where is the catch in this case? Well obviously central banks have infinite amounts of money because money are not mined in some far away land but are computer generated. If something has infinite supply then standard logic says that it must have zero value. And modern fiat money does have zero intrinsic value. Its only value comes from the confidence people have in it. If that confidence is lost then the system collapses.  The more you print the less confidence you have that it may be worth anything.  And this is exactly the risk we are running which is analogous to the gambler's ruin.

So what is the bet that the central banks are taking when they print huge quantities of money. It is very simple. They bet that growth would kick in and inflation would lower the value of debt before people absolutely lose faith in the fiat currency they hold. As long as inflation is tamed then they can continue printing. Unfortunately, without realising they have engaged into the gambler's ruin strategy and suffer from the Gambler's Fallacy.


Gambler's Fallacy

Gambler's Fallacy is another great way that probabilities can fool you into thinking that you are a gambling genius. If for example, G.Neous plays the roulette and number 35 comes up 5 times in a row you may think that the probability of coming up again for the 6th time must be very very small. So you place your bet on everything else but 35. Or you may think that there is some hidden pattern and 35 would come up again for the 6th time. Wrong! Number 35 has exactly the same probability of coming up in a fair roulette (1 into 37 if there is only one zero in the roulette).
Policy makers have fallen into the gambler's fallacy trap. They believe that since inflation is mostly under control after two large doses of printing that would also be the case next time. They are running similar risks to our gambling friend G.Neous. Their thinking is not just wrong it is absolutely criminally dangerous. The more we print the closer we come to the abyss. Unfortunately as far as I know there is no direct measure or index  that captures the  faith on the fiat currency. Some people look at the price of gold or other physical assets in order to gauge it. My intuition tells me that if something appear to be too good to be true, then it is too good to be true.

Conclusion

There is growing evidence that policy makers on both sides of the Atlantic are committing the same mistakes our G.Neous gambler is making.They seem to engage the Gambler's ruin strategy as the best exit strategy out of the financial mess and their decision making process is based on a Gambler's fallacy. Let us hope (only thing we can do) that it works on this coin toss because there may be no more coin games later.