(non)Compliant ECB. SMP and the PSI

As of writing this Note the ECB-Hellenic Republic swap of the SMP holdings is unconfirmed. However, most market participants think that in one way or another it must happen in order for the PSI to proceed smoothly.

Mechanics of the swap

• Greece issues a new debt series under Greek law with new ISIN (Identification numbers) and exchanges these new bonds with the bonds that the ECB owns in the SMP
• The new bonds may be identical to the swapped ones apart from the ISIN number. 
•  Greece should destroy the old bonds immediately; otherwise the Greek debt has increased by 50billion. Also I am not sure as to the legal repercussions of holding your own bonds for more than few days or perhaps weeks. 
•  ECB gets repaid and passes the profits to the NCB which in turn they pass it to Greece if they so wish. This would be fun to watch as the NCB’s would participate and incur losses with the bonds they own in their investment portfolio (estimates of 10billion). One can imagine an NCB making losses in their own investment and feeling very reluctant to pass the distributed SMP gains to Greece. 
•  Perhaps the Greek side should demand this on paper. i.e. if the NCB’s do not return this profit then it is automatically subtracted from their country’s  loans to Greece. 
•  The intention of returning some of the profits back to Greece raises some interesting compliance questions (see below). 
•  Could perhaps find a way to do this swap with retail investors too? Who knows.

Τεχνικές λεπτομέρειες για το «κούρεμα» ομολόγων

Read the Article in Kathimerini (in Greek)
or
Οι επόμενες εβδομάδες προβλέπονται ταραχώδεις για την εφαρμογή του PSI. Ο ένας λόγος έχει να κάνει με τα πολιτικά παιχνίδια και ο δεύτερος είναι καθαρά τεχνικός. Οσον αφορά την πολιτική, έχουμε γίνει μάρτυρες μιας συνεχούς παλινδρόμησης στον τρόπο σκέψης, στους στόχους, αλλά και στις επιδιώξεις πολλών ευρωπαϊκών χωρών. Είδαμε μια σκλήρυνση της στάσης πολλών χωρών αμέσως μετά την ψήφιση του νομοσχεδίου. Η αναβολή όμως για τη Δευτέρα, 20 Φεβρουαρίου, των αποφάσεων της Ευρώπης και η συνεχής έγερση νέων αλλά και παλαιότερων απαιτήσεων από μέρους των εταίρων μας δημιουργεί ερωτήματα ως προς τις προθέσεις μερίδας της Ευρώπης. Δεν βοηθά όμως και η υποψία πως από τις εκλογές ενδέχεται να προκύψει μια Βουλή ανίκανη ή ακόμα και εχθρική προς τις αλλαγές.

Report by Die Welt that Greece buys ECB (Updated)

According to unconfirmed reports the ECB would sell all of its SMP holdings back to Greece at par. You may ask were would Greece find the money to do so. Well, Greece can always issue new Greek bonds in lieu of payment and do an exchange through the Euroclear accounts. This is a standard restructuring trick aiming to avoid compliance issues with off market transactions. But compliance is only for commercial banks not for central banks and governments. Or it could get newly issue EFSF bonds to do so but this is harder as it requires approval by the national governments. We do not know the nature of the new bonds but one has to assume that they would be under English law (reports that they are under Greek law) It may further have  covenants like "the bondholder may but is not obliged to call a credit event" (like the bilateral loans under the bailout agreement).  Or it may have covenants that effectively make the new bonds senior to any other claim like "the present series of bonds are exempt from any moping up law". The later may be easier done if the new bonds are under English law.The truth is that we do not know the details.
 ECB Profits
The ECB may further distribute any profits to the NCB which can then do as they wish. the profits come from the coupons they have collected and also from the difference between purchase price and the Par redemption. The ECB has every right to distribute the profits to its shareholders the NCB's. Thus it would be up to the NCB's to return if they wish so the money to Greece. I can imagine that some may do so reluctantly.

Could this debt swap be a disorderly default omen? In other words default is coming and the ECB is jumping the ship? I doubt this very much. If Greece defaults then it would be hard for the ECB to pretend than their holdings are different. Unless of course the ECB gets EFSF bonds and the loss goes to the loan given by the EFSF to Greece i.e. Back to Germany again.
Could that debt swap have to do with the introduction of CAC using a moping up law in Greece? I think this is more likely. If this is the case, then as we said many times before it would be good news for the participation rate, bad news for big institutional investors and possibly good news for retail investors.

Some time ago we presented a proposal for improving the PSI (see, here, here and here,). It involved two stages.

• Stage 1. Buy the ECB to reduce the hold out incentives
• Stage 2. Offer the option to cash out bondholders alongside the bond swap.

We argued that this would reduce the debt to GDP for Greece to around 100% from day one making it sustainable. If the reports are right Stage 1. is completed. It remains to be seen if Stage 2 would be adopted.

Postponing PSI?

The next month is not going to be easy for the faint hearted. There are two basic problems:

• Politics
• Technical Details

With respect to politics we are witnessing shift in the attitudes of some countries in Europe. Here is a rough timeline:

• Greek parliament succumbed to Troika’a demands on Sunday 12th Feb. The idea was to have a Eurogroup on the 15th so for the PSI process to start by the 17th or Monday 20th the latest.
• Europe decided to play hard ball and demanded to plug an apparent hole of 325mln in the measures approved. They also demanded written assurances by the main Greek coalition leaders.
• Having gotten the letters of compliance from the Greek leaders then the EU proceeded in delaying the Eurogroup decision for Monday the 20th Feb.
• Old demands with a new guise are resurfacing, like an escrow account, permanent presence of Troika in Athens (sovereignty issues), Commissar etc.  
• The delay may mean pushing the PSI after the famous March12 bond redemption

And to top it there may be an election in April which may produce a parliament that would be unable or unwilling to push the reforms. All these add to the uncertainty going forward. It is thus not surprising that as was reported by the Financial Times, legal opinion was taken as to how one can pull back an offer once it has started.


Many claim that the hard stance of Europe signifies a change of heart and that Europe wants Greece out of the Union. If this is true then the optimal course of action for Greece would be to pull back from the PSI and default under Greek law.  If on the other hand it is just a bluff then postponing after the election may be optimal.

European ambivalence

It is is crunch time for Europe. It also crunch time for the ECB and Greece. Time is running out not just for Greece and the March bond maturity but for Europe too. There are plenty of signs that many European governments are having second thoughts about the PSI and the second rescue package for Greece. This is not entirely surprising. The attitude of the Greek government was not exactly encouraging for Europe. Watching the live debate one could not help but despair. Speaker after speaker, minister after minister spoke of how bad the new MOU is for Greece. They only vote for it to get the money and avoid exit from Europe. Even the finance minister Mr Venizelos called it a choice between a bad and something worse. It was left to the PM Papademos to carry the burden of defending the positive aspects of it, which Greece needs to reform in order to survive. One can be cynical and say that this is just political posturing and that once they get re-elected they will follow Troika’s orders. This is not how democracy is supposed to work. This is exactly the kind of attitude that brought Greece to the brink of collapse. It does not instil confidence to the political system. 

As such many European governments are coming to the conclusion that they should let Greece go. 

The Choice of Hercules

Hercules
For a version in Greek click Ελληνικά

Hercules as the myth goes was the product of the supreme God of Gods Zeus with a mortal woman Alcmene[1]. As such he was himself at least half a God. However, he did not start his life with a right foot. He was punished by his mortal step-father to the duty of herding sheep for the murder of his music teacher Linus. Hercules in his exile stayed with Thespius, who conveniently for Hercules was the father of 50 daughters. According to some versions Hercules proceeded into sleeping with all of them in one go[2] but this never made it as the 13^th labour. Thus, Hercules did not start life as the hero that was to become later. He was easily swayed by earthly pleasures like lovemaking and was also a murderer. Not a typical role model even for those mythical days. What changed him though? Why do most of us remember the labours of Hercules and we have him in such a high esteem? The answer comes from Xenophon, who describes (through the sayings of Socrates) “The Choice of Hercules”.

Greece and the West. A Failed Act of Union

The date is July, 5^th 1439. The place is beautiful Florence. The issue is an Act of Union, but not any Union. It is the union of the Greek Orthodox Church (East Roman Empire) with the West (Papism). All the Orthodox representatives are there, from the Emperor John to Russian bishops. Pope Eugenius IV is leading the West’s delegation. On the table to be signed is the following “We decree that the Holy Apostolic Throne and Roman Pontiff possess a primacy over the whole earth, and that this Roman Pontiff is the Successor of the blessed Peter, Prince of the Apostles…..” you get the gist. 

LSE Panel debate on PSI

For all those who could not make it on the 2nd of February to the LSE panel discussion on the PSI. The panellists were:
Dr Jeromin Zettelmeyer, Deputy Chief Economist at the European Bank for Reconstruction and Development and former senior advisor at the Research Department of the IMF
Dr Rodrigo Olivares-Caminal, Lecturer at the Centre for Commercial Law Studies at Queen Mary College, an expert on sovereign debt and insolvency law who has acted as policy expert and consultant to various multilateral institutions and international organisations
Dr Nick Firoozye, Managing Director and Head of European Rates Strategy at Nomura. 
Dr Andreas Koutras, Director of ITC Markets, a senior market analyst who has written extensively on the Greek PSI and has put forward a proposal involving a so-called "buy-back option" on the Greek PSI.  
 The event was chaired by Dr Vassilis Monastiriotisof the LSE.
The presentations are in LSE Hellenic Obervatory.There would also be podcast available soon.

A Bridge (loan) Too Far?

Bridge at Arnhem.

In September 1944, the allies had a daring plan. They would try to force an entry into Germany by overrunning the bridges of the Maas and Rhine River with airborne forces. If successful, the end of the war would be sped up, possibly to Christmas 1944. Thus the legend of Para Lt Colonel John Frost and the sacrifice at Arnhem was borne. Operation Market Garden as it was named ultimately was a failure. The Hollywood film was not. Incidentally, the film’s title apparently comes from Gen. Browning comment “I think we might be going a bridge too far”.

Can Greece reform itself? Can Germany and Europe help?

Many of us have pondered how is it possible for Greece to have missed most if not all the targets that were set by the Troika? How incompetent can they be? Why is it that after two years with Greece on the brink of oblivion the Greek politicians still play games and refuse to implement what they signed up to? How difficult is it to reform the Greek economy? What can Germany do?

German Experience

Let me attempt to answer using my personal experience. Back in the late 1990’s I found myself as a postdoctoral fellow in Germany with the Max Planck Gesellschaft. It was in the city of Jena (Thuringia) of the former East Germany. Jena is famous for the Carl Zeiss optics and also for the battle (1806) that subjugated Prussia to the French empire (Napoleon) which in turn gave its name to a Paris Metro station. When the German unification (or takeover) happened Jena changed drastically. More than 20,000 people working at the Carl Zeiss Jenoptik factory were fired and in a city of 100,000 it meant misery. Unemployment soared and political extremist was rife. Despite the resources thrown by Germany, Thuringia was still a Least Favourite Region 7 years (EEC classification) after the “change”.  Incidentally, the whole of Greece was classified as a Least Favourite region for most of the 80-90’s. At work even after 6 years you could divide your colleagues into two groups. Those that embraced the new order of things and those that chose to resist and live in the past. It was not an age division but rather a cultural and a character differentiation. Sometimes the more enthusiastic proponents of change were of the older generation. My professor was in charge of reading the Staatssicherheit files (Stasi) and making sure that people who did serious harm were put aside. Although many “politicians” that were entangled with the old regime conveniently reformed themselves to survive, many were side-lined or forced to early retirement. Slowly the 2-stroke Trabants were replaced by the Audi’s vorsprung durch technik. It took many years and the enormous resources of West Germany to make the change. Germany run deficits of up to 13.2% and threw more than ½ the total savings of West Germany to subsidise the East. Europe also help by first endorsing the unification and also financial even unwittingly. The result in Europe was the collapse of the Exchange Rate Mechanism through the rapid appreciation of the DM caused by the increase in interest rates. Effectively, the rest of Europe paid for the unification efforts of Germany through the devaluations.

Greece

I mentioned East Germany because there are many parallels with Greece. Although Greece was on the other side of the Iron Curtain (Churchill 1946), the economic policies for many years were little different. Greece had and still has a state run economy. Decades of state mismanagement has created not only a state monster but also generations of politicians and people who learned to accept and navigate this labyrinth as was the case in GDR. Many of the ones with a conscience that refused to accept corruption, political oppression and nepotism as a way of life left the country. Contrary to East Germany there was no wall to stop them. As a result the forces of healthy change were weakened. Politicians were voted in on the promise of favours or job allocations. No one cared about prudent policies or good governance. In addition, the EEC (later EU) subsidies provided the requisite money with few if any strings attached (remember COMECON). Politicians used these subsidies in order to get re-elected. There was no need to change anything! Thus, Greece started exhibiting many of the characteristics of a failed state. The bureaucracy failed and together Greece failed.

The EU woke up to the problem rather late and it demanded from Greece to change all this in space of few months. However, none of the politicians or the political parties that are heavily responsible for this mess has been removed, reformed or changed. The analogy with Germany is trying to change Ostdeutschland into West Germany by keeping Eric Honecker and its party fully in control of the implementation. It cannot happen.

Conclusion

I am not trying to excuse Greece or the Greeks from their responsibility. Greece needs help from Europe in order to reform, not just financial assistance. They need to change their memes (cultural genes) and this takes time. The money that Troika is pledging to Greece is seen by many as way to propel and support a corrupt political system. After all, the Greek cabinet is little changed from two years ago. Strict conditionality should be placed on the politicians. Perhaps the EU could help by encouraging the current PM to form a new political party to cover the middle ground that is now disintegrating. Not doing so would push ordinary Greeks to the extreme left and right. This is not in the benefit of Europe.

Please excuse my exaggerated and possibly dramatic analogy (being Greek I cannot help it) with East Germany. East Germans suffered hard and long and many generations paid a high price in terms of lost potential, lost aspirations and lost lives. We should try to avoid a repeat of this bad movie.

Greece needs more than financial help. It needs a dream and a hope. Many East Germans dreamt and hoped of the day their country and families would be united. What are the Greeks dreaming about? More taxes? What are the aspirations of the young unemployed Greeks? Immigrating? The Greek political establishment in power for the last 30y has failed and needs to be swept aside. Europe is more than just an economic union. It is an ideal fostered and hammered through many centuries and many bloody wars. Now is the time for the European ideal to take the driving seat.

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.