Schauble Proposes Greek Maturity Extension

It’s being discussed in the comments already but it’s worth giving German Finance Minister Wolfgang Schauble’s letter to the ECB, IMF and Ecofin ministers its own thread. The key proposal:

This means that any agreement on 20 June has to include a clear mandate — given to Greece possibly together with the IMF — to initiate the process of involving holders of Greek bonds. this process has to lead to a quantified and substantial contribution of bondholders to the support effort, beyond a pure Vienna initiative approach. Such a result can best be reached through a bond swap leading to a prolongation of the outstanding Greek sovereign bonds by seven years, at the same time giving Greece the necessary time to fully implement the necessary reforms and regain market confidence.

Just to be parochial about this for a minute, this raises an interesting question. If this approach was implemented successfully and did not trigger a financial crisis (I know some disagree — this is a hypothetical question) what are the chances that a similar restructuring would not be part of any potential second EU-IMF deal for Ireland?

33 thoughts on “Schauble Proposes Greek Maturity Extension”

  1. It’s important to remember that Schauble is discussing sovereign debt here, not bank debt.

    However, any additional financial support for Greece has to involve a fair burden sharing between taxpayers and private investors

    Versus the ECB’s Mr Bini on mere bank debt:

    Moreover, given the decentralised structure of the regulatory and supervisory systems, the impact of a banking crisis is ultimately absorbed by the national budgets. The Irish crisis shows the danger of a fragile banking system becoming interwoven with fragile public finances.

    To reduce the dependence of the euro area as a whole on local events the link between a country’s public finances and its national banking system needs to be severed. This link stems from the assumption – mistaken as we shall see – that regulation and prudential supervision must be carried out at national level because ultimately the country’s taxpayers have to bear the costs of any bank failures.

    Though, given everyone is so reluctant to crystallise losses*, why isn’t an ECB QE programme on the agenda?

    (* note: everyone excludes Irish sovereign and other patsies)

  2. @ Ahura

    “Though, given everyone is so reluctant to crystallise losses*, why isn’t an ECB QE programme on the agenda?”

    Because its opponents fear it would lead to inflation greater than 2 percent.

    Which, as everyone knows, would be the worst thing in the world …

  3. Going a bit slowly here:

    So it looks like, right now:

    (1) Greek government: not fully implementing their MoU, lower interest rate (?), and private bail-in to extend repayments.

    (2) Irish government: implementing MoU, higher interest rate (?), no private bail-in conceivable, not even on senior private bank debt.

    Is that right?

    Is it possible, that having said the above, that this might be of some benefit to Ireland, as the markets might further differentiate between the two countries?

  4. Now and then I see comments calling for more discussion of political and/or political economy aspects of the EZ mess. So let it be known that Henry Farrell has a post at Crooked Timber about all that stuff. I thought the paper by Fritz Scharpf very good. I don’t mean to divert discussion from Schauble, so suggest that non-Schauble-related comments go to CT. (But note that CT has a comments policy and they can get quite shirty if you ignore it.)

  5. Gavin you can only require bondholders to take any kind of loss if there is no state or isstitution remaining that can be leant on sufficiently to bail them out. So you buy bank debt, knowing it will always be bailed out by the state. You buy sovereign debt knowing that “official funders” will bail it out.

    The only reason you might think about credit risk is if the sov you are buying might have too much debt to be bailed out.

    All that stuff about allocating capital efficiently based on economic analysis is soooo last century.

  6. @ Gavin

    Listen to the Buiter YouTube kindly supplied by the Dork. Greece is (maybe) getting liquidity support from the private sector not solvency support. This is only better than Troika support if the rolled over bonds are cheaper than the Troika rate, which, given that the rollover will be “voluntary”, I very much doubt will be the case.

    Behind your comment is a national inferiority/martyr complex, very prevalent in these parts, that our team are patsies and we are getting mugged compared to those cute hoors in Greece/Portugal.

  7. As I posted on another thread, if Schaeuble can pull this off it will be a major victory. If you look at the “plan”, moral hazard is one of the components and it would appear that the only way he can get the rating agencies inboard is to enhance the existing sovereign bonds by increasing the coupon.

  8. “Voluntary” restructuring??

    I have asked this in another thread but why on earth would a bank, say, who had hedged its Greek bonds in the CDS market ever accept such a proposition. The threat of default does not apply to it as it is hedged whereas to accept a roll-over would invalidate the CDS hedge.

  9. @BW II
    Personnally, I assume that most holders of Greek bonds are largely unhedged. My understanding is that the Greek CDS market is rather small.

  10. If Greece undergoes a “voluntary coercive re profiling (I know) what would be the attitude of the rating agencies. Would they not downgrade Ireland to junkier status. Who would buy then & how do NTMA come back in any time frame.

  11. @ Incognito

    Thanks. This understanding, which I presume to be correct, rather counters the view in another thread that the primary concern of the ECB in formulating a solution is to avoid a call on Greek CDS at all costs.

  12. @Gavin,

    Dealing with the Greek sovereign debt mountain is actually easier than unwinding the ECB’s (and ICB’s) extraordinary ‘liquidity’ support of the Irish banking system.

  13. @ Brian Woods II

    “Behind your comment is a national inferiority/martyr complex, very prevalent in these parts, that our team are patsies and we are getting mugged compared to those cute hoors in Greece/Portugal.”

    Such was not intended. I was going for a ‘where are we now’ summary: how will this development effect the overall picture? I’m not sorry for Ireland (any more than I am for the Greeks, or the Germans for that matter), more trying to work out what is happening. I’m all for a good outcome for the people of Ireland from this, but not, I hope, in a morbid way.

    I’ll have a look at Buiter and the link from Kevin D.

  14. @BW II
    I think that the ECB wants to avoid at all costs that defaulting (whatever its form) would be seen as a normal course of business for Euro Area sovereigns, a development which would probably lead to permanently higher bond yields for many Euro Area countries (including but not only Greece, Ireland and Portugal).

    The CDS triggers are one criteria in this respect, but probably not the only one.

  15. Oh..and another thing. All those who advocated burning bank bondholders , who bitterly regret it wasn’t done or who are determined to see the burning of any left fail to realise that this would have meant the immediate realisation of the collateral attaching to the banks’ loans that would have to be foreclosed to match the bond haircutting – if not the full liquidiation of the banks themselves. For a while we had some of the ‘big names’ here advocating such a course of action.

    If markets overshoot during a bubble – and bubbly property markets are overshooters par excellence – they undershoot when the bubble bursts and can stay undershot for a hell of a long time.

    Economists, if they are true to their discipline, must take the forward-looking view – sunk costs are irrelevant to future decisions. Some even sound like the Austrians – bygones are forever bygones. But they aren’t very good on dealing with the legacy contractualised costs (and the extent to which these may be managed and recovered) – or on the transition from pricking a bubble – or a bubble bursting – to a stable fucntioning market.

    The scale of the ECB’s and ICB’s ‘liquidity’ support is an objective and painful measure both of the madness and delusion and of the scale of the efforts required to prevent a total collapse of the property market and the banking system.

  16. @ Gavin

    Yes, upon a re-read I see that you were speaking positively, apologies. I guess I too have become paranoid.

    @ Incognito

    Thanks, that makes sense.

  17. The big question is whether new EFSM/F funds get senior status to the existing private sovereign debt. Also the ECB genuinely believes it would have legal problems in accepting Greek sovereign debt as collateral in case of a mere extension…with extensions+junior status…that debt would be toxic

  18. @Incognito/BW

    Given the very murky world that is the CDS market I’m pretty sure nobody really has a clue what the size of the Greek CDS market actually is. Basing ones worries as the ECB and Geitner seem to have done on this issue is rather silly to say the least particularly when the bigger picture regarding the impact on the general economy of the measures to tackle the problem are already causing serious grief (Greek unemployment now running at 16.2%).

  19. Can I second Kevin Donoghue’s recommendation that anyone with an hour or two to spare on political economy have a look at the Fritz Scharpf paper linked off of the Crooked Timber link?

    The paper is entitled “Monetary Union, Fiscal Crisis and the Preemption of Democracy”and the PDF is at http://bit.ly/iPwN69

  20. From the letter

    “. A return by Greece to the capital markets within 2012, as assumed by the current programme, seems more than unrealistic. This means that the volume of the current programme is insufficient to cover Greece’s financial needs over the programme period.

    As we know, this creates problems regarding the participation of the IMF.”

    Within his brilliantly short and terse letter, Mr. Schauble highlights the fact that the prospective failure of the Greek deal to allow Greece return to the markets will cause immediate difficulties for IMF participation.

    Mr. Schauble is very much forcing the issue by spelling out the hopelessness (“more than unrealistic”) of the Greek Deal working.

    This is why Leo Varadkar’s remarks were so serious. Leo Varadkar was close to forcing the issue for the IMF in Ireland too.

  21. @bw2

    The net notional cds on greek debt is only about 6bn or so. Even if it is for some reason, actually double that, it is a red herring the politicians find convenient. The cds can therefore be shafted to appease the politicians and the ECB’s no default mantra.

    The banks are mainly straightforward idiot long holders – often picking up pennies in front of the steamroller they are too avaricious to notice, by buying peripheral debt for to fulfill regulatory requirements.

    Other bits of the banks use cds to hedge in structuring all sorts of stuff including the useful stuff – like lending. The hedgies that are into Greek cds are not material to the overall picture – and nobody is going to be asked to bail them out 😉

  22. @zhou

    “This is why Leo Varadkar’s remarks were so serious. Leo Varadkar was close to forcing the issue for the IMF in Ireland too.”

    It is much easier for the senior bonds to be repaid and then later on realise that it wasn’t necessarily the right thing to have done. Everyone will be able to sign up to that. No need to force anything. Easier to close gates without the risk of a bolting horse getting in the way, best wait ’till the coast is clear.

  23. @grumpy

    Leo Varadkar may be right in seeking to force the issue. However, it would be better if he were speaking on behalf of the Government. He got slapped down and then claimed he himself was naive, i.e. that he didn’t understand what he was doing. I don’t believe in praising people for doing the right thing by accident. Also, one would suspect that the Irish Govt will wait to see how things play out for Greece before we go nuclear.

  24. You can’t help but think that the Germans are making it pretty clear where they really stand on the European project. Even Obama’s overtures to Germany during Merkel’s visit there stressed Germany at the centre of Europe – and Merkel was conditional in her support for the Euro project.

    Whatever way the current Greek crisis resolves itself it has provided chilling warnings about what lies ahead. Germany has a limit that may be closer than we think.

    We need to prepare for this situation ourselves now. We can forget about going to the markets or another bailout. Morgan Kelly’s solution may yet be forced upon us – sooner than we think

  25. Personnally, I regard this as an extremely important debate. On the one hand, I understand the position of the ECB: no default, whatever the cost.

    The problem of course is that the ‘cost’ of that policy is very high. Basically, every time a bond comes to maturity, the credit risk is transferred from the original bondholders to the Euro Area taxpayers. Could be acceptable if the credit risk was low, but it is clearly not the case.

    The position of Schäuble is basically that bondholders should be forced to keep skin in the game. Additional advantage: taxpayers only have to fund the budget deficit, but not the debt paybacks. That reduces the amounts that have to be footed by taxpayers by about 2/3rds initially, and even more later on. But technically, his proposal amounts to a default, although rather of the soft kind.

    The compromise version, namely voluntary roll-over, might avoid the default tag while ensuring that bondholders keep skin in the game. But it will certainly suffer from the freerider problem, namely those bondholders who do not roll over voluntarily and who might still get 100% back when their bonds mature.

    Frankly, I don’t know what is the best solution.

  26. I think that the problem here is that the Germans have outfoxed everybody.
    They’re sheltered themselves and their banks as much as possible from the ramifications of a defaul.
    Why should they re-expose themselves now through putting their taxpayers on the line.
    Default at this point is the cheapest way for Germany to get out of this mess (not for everyone else of course…)

  27. Re CDS, as posted on another thread – “The net Greek (and other) CDS numbers, such as they’re available, can be accessed on http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5. DTCC is reckoned to be the biggest CDS clearing house, but I’ve no idea what percentage of the market they represent. Latest number for open interest is $5.207bn (out of a gross $76bn).”

    Determination of a CDS-triggering credit event is the preserve of industry body ISDA (http://www2.isda.org/). I can’t find a link, but heard reported today that this body would not see a Greek maturity extension as a credit event, depending on participation rates and terms.

    With Greek CDS at record levels, in aggregate those banks which have written the business stand to lose if the contracts are triggered. If not triggered, they will instead continue to enjoy receipt of annual premiums over the remaining life of the contracts – a fairly hefty sum on $76bn.

    Cui bono?

  28. @ Eureka

    i tend to agree with you the Germans have played their hand very well
    though it must be said that the ECB have aided the Germans

  29. @ Eureka

    i tend to agree with you the Germans have played their hand very well
    though it must be said that the ECB have aided the Germans in helping to reduce Germany`s exposure in the Euro zone periphery

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