1 Feb 2012

New Greek Proposal Even Greater Creditor Losses and Officials Attack EU and IMF as Debt Talks Stall

Greek officials launched a vociferous behind the scenes attack on European Union and International Monetary Fund negotiators as talks in Athens over the country's mounting debts appeared to stall.
Prime minister Lucas Papademos told aides that a crisis meeting of party leaders would be called as early as Thursday to thrash out a response to an increasingly intransigent negotiating team sent by Brussels, which is demanding severe austerity measures before sanctioning a further €130bn (£109bn) of bailout funds.
Papademos, the economist temporarily heading a transition government in Athens, wants party leaders backing his administration to make further concessions to bring talks to a swift end.
Papademos and his team of aides returned in sombre mood on Tuesday from a round of talks in Brussels and Frankfurt at the offices of the European Central Bank (ECB), despite relief that a German proposal to install an EU commissioner in Athens, with special oversight of Greek finances, had been quashed.
One aide said: "All round there is an understanding that the situation is quite dramatic. Our discussions in Brussels were tough and honest with things being laid out in an austere manner.
"We understand how difficult it is for MPs who are now faced with the hard option of voting through another round of austerity measures but the stakes are very high and one of our greatest concerns is that they don't understand just how high they are."

Athens is holding parallel talks with private creditors over a 50% writedown of its debts while also meeting a troika of negotiators from the EU, IMF and ECB over a new bailout fund. Greece must obtain agreement for further bailout funds to be released before it can conclude the deal with its private creditors. Talks with private creditors, which are expected to slice an estimated €100bn from Greece's €350bn debt pile, have faced difficulties following objections from banks that they are being asked to take bigger losses than they expected after a deterioration in the outlook for the Greek economy.
However, finance minister Evangelos Venizelos put on a brave face publicly and said that he believed an agreement on the debt swap was close. "We are one step [away]. I would say it is a formality away from finalising (the debt relief agreement)," Venizelos told a news conference. "The next few days will determine what happens over the coming decade."
On the negotiations over the bailout funds, Greek MPs have objected to demands by the troika for further wage cuts and reductions in the minimum wage.
"The troika doesn't appear to be willing to accept any concessions whatsoever on reducing the minimum wage and scrapping bonuses," said the government aide. "No political party is willing to move either, saying wage cuts are a red line they are simply not going to cross. You tell me how this is going to be resolved. We have no idea and we're very worried."
The deadlock in Athens followed poor unemployment data for the eurozone that revealed a widening split between the continent's rich north and indebted south.
Figures for December showed unemployment at a record high of 10.4%. Spain's unemployment stands at a staggering 22.9% and Greece's is not far behind at 19.2%. Germany's unemployment rate fell to 6.7% in January, separate figures showed, a new record low since figures for a unified Germany were first published, while Austria boasted the eurozone's lowest jobless rate at 4.1%, followed by the Netherlands at 4.9%. 

Greece Releases New Proposal With Even Greater Losses To Creditors

Tyler Durden's picture
The most recent addition to the "I am Jack's complete lack of surprise" pile comes from Reuters, which reports that the latest out of Greece is a proposal for even greater cuts for creditors than previously expected. From Reuters: "Greece's private sector creditors could take a loss of more than 70 percent in a planned debt swap, Finance Minister Evangelos Venizelos said on Tuesday. "There is a very serious discussion based on new factsWe are talking about a PSI much greater than the original," he told lawmakers, referring to private sector involvement in the deal. "We are talking about a haircut on the net present value exceeding 70 percent," he said."
What this means, simply, is that when calculating the NPV of the post-reorg bond, the Yield to Maturity is now less than 30%, and thus is likely going to have a cash coupon of about 3.6%. This is relevant because as is known, one component of the creditor recovery is receipt of EFSF bill in lieu of cash to the tune of 15 cents of notional, and the balance, at least until this point, would have been a 35% yielding piece of post-reorg paper (for a 50 cent total cut as agreed upon in the October bailout). That was the case when the cash coupon was 4%. Going forward, and assuming a 3.6% cash coupon, the return on this fresh start debt drops substantially. Needless to say, creditors will almost certainly balk at this, because when it comes to calculating real yield, most are expecting a roughly 90% recovery at best on the EFSF strip (as every fund will scramble to dump their paper), so 14 cents on the total, and then funds are also hoping for at least 1 year of current yield, i.e., cash coupon. It becomes iffy around the 2 year mark, as it is a roughly 90% probability that Greece will file for bankruptcy yet again just after the first coupon is paid, at least according to hedge fund return calculations. It also means that nobody gives a rats ass about the IRR (as nobody expect to get post-reorg bond principal at maturity), and all are solely concerned with what the cash coupon will be that they can collect for one, max two years.
Which explains why at 14 cents + 3.6 + 3.6 or 21.2, which is where Greek paper trades currently, there is absolutely no upside for creditors, and the only real upside option is to hold out for sovereign debt litigation, where the recovery could be as high as par. Expect no deal to come out of this, despite what the IFF, which now likely represents just Deutsche Bank and SocGen, says. So much for that upper hand.

1 comment: