Steinbrück: Admit Greece will need restructuring

Given the recent discussions of  the views of Professor H-W Sinn on this site it seems only right to point out that there are also other opinions in Germany. A number of current and former German politicians (Helmut Schmidt, Joschka Fischer) have been critical of the leadership provided by key politicians. Now the former finance minister Peer Steinbrück (still an active opposition politician) has found some clear words: “Greek default is inevitable – lets call a debtors conference.”

By Edgar Morgenroth

Professor of Economics at Dublin City University Business School

121 replies on “Steinbrück: Admit Greece will need restructuring”

Greeks may have to call out tanks
“Speaking on Skai, Robopoulos also criticized recent remarks by Theodoros Pangalos, the government’s outspoken deputy prime minister, who warned that unless lawmakers pass the austerity measures the government may be forced to call out tanks to prevent a run on the banks – an image reminiscent of the 1967 military coup, one of the darkest days in the country’s modern history.

“Pangalos’s arguments have only made things more difficult for us. He is trying to put psychological pressure on the deputies, and that is not right,” he said.

They seem to be getting desperate…have we any tanks?


You’d think he’d be the cheery sort who thinks it’s all good, but instead seems to favour the view that it’s wise to shoot a demonstrator or two in order to encourage the others.

Interesting him calling for a restructuring on “a lonely Greek island with no journalists”…maybe he wants to invite a team of Estate agents and willing German buyers ?

If that doesn’t work we could try to sell them the Blasket Island, then make leaving cert students read Peig in German instead….

The French solution to Greece is peculiar: . In essence an almighty kick to touch, which does nothing to resolve risk/uncertainty. Also, with their private banks due to get 30% back soon, that means that 30% will be shielded from any future haircut. And of course that 30% will be replaced with EU money…thus the principal effect of the French deal, is to subsidize private French banks. Axl Weber is even decrying this lunacy…when will our Eurocrat masters exit reality denial ?

@LHE – He is talking about debt forgiveness and not how to squeeze Greece more.

@Desmond Brennan – the French proposal is of course only in the interests of France. Merkel is letting Sarkozy get way with this e.g. the ECB board decision last week.


Do you think the Germans will call him on this or are they reconciled to paying a price to keep the Greeks inside the tent. Greek credit risk is effectively being replaced by some weigthed average of Greek and Core EU credit risk. For which read the French banks are upgrading from an Athenian taxpayer to an Athenian plus a German taxpayer.

Greece is still as insolvent as before this deal.

This is the French answer to Schaubles private sector participation. He is not going to be happy. Now that there is a bit of pressure building in Germany and a number of influential voices are getting quite noisy, Merkel will need to be careful. The electoral failures earlyer in the year have left some big bruises in the CDU – if she gets this wrong there will be a backbench revolt.


Well then you are staring down the barrel of a messy Greak default, an exit of 1 or 3 from the Euro and the probable destruction of the Franco-German axis.

Would be great if we could check out the probabilities in all of this.
If Greece defaults
1: Probability of massive German bank failure (15%)
2 Probability of massive French bank failure (20%)
3: Probability of problems for Spain (95%)
4: Probability of problems for Italy (60%)

I think that the Germans are looking at this in a slightly blinkered way. They know that they will be able to weather the storm of a Greek default but the big problem is Spain/Italy. I don’t know enough about this but it almost seems like the markets use the small economies like guinea PIIGS to try out the tactics to bring the larger PIIGS to their knees (and ultimately the European core)

While Enda has been cracking bad jokes with Sarkozy the demise of the Euro is becoming all too clear. It’s each country for themselves now. Germany will be ok and France not too bad. We’re in for one hell of a rude awakening.

I see the Swiss Franc reached 1.18 against the Euro last week.
How much higher can it realistically go ?


Well, okay, the island thing is hyperbolic. but my point is, debt default is a zero-sum game, with the Nash equilibrium settling on more Greek austerity.

Either the creditors get burned, then Greece has to get squeezed, cause no one is going to lend to them, or else the German taxpayer gets burned, then the Germans are at least going to want to impose fiscal discipline from Berlin, so we’re back to squeezing Greeks, or else the Greeks voluntarily squeeze themselves and balance their own budgets.

Any other option involves someone other than Greeks getting squeezed. And frankly, that would be wrong.

@Ludwig Heinrich Edler: …debt default is a zero-sum game….

I’d say it’s positive sum, since the EU economy is operating below potential and the marginal propensity to consume of debtors is larger than that of creditors.

IMHO it looks like “haircuts” all round will be taking place sooner than 2013.Maybe as early as September this year and not much later than May (French Presidential elections) 2012.

Meanwhile by the end of this week I would not be surprised if we will all be adding a new verbal noun to our socio/economic lexicon as European leaders scramble to avoid using the word “default” in relation to the unfolding Greek crisis.

I just hope that the Greek military stay in their barracks which is probably more likely if unrest and mass public discontent can be avoided and is obviously the biggest priority for law makers in Athens .

IMHO whatever the Greeks decide this week they should be supported by EU members who should not forget what the real objectives of the European Project actually are.

This comes down to what is cheapest. There is no way around austerity for Greece. If there is an unorderly default they will be austerity. if there is an orderly restructuring this will only be Iacceptable to German tax payers with austerity. The big problem is that Greece is increasingly looking like a failed state.
I dare say that an disorderly default is globally the most costly option.
You might get run over by a bus while kicking the can down the road. Let’s face it kicking the can has not make it disappear.
That leaves some sort of orderly restructuring. German tax payers will need to put their hands in their pockets!

What’s that? Mr. Steinbrück is suggesting that investors who risk their money on investments should actually face the prospect of losing money?

Blasphemy. All Debts Must Be Paid. The economy won’t work otherwise. How else can civil servants across the continent persuade financiers to pay their wages and pensions?


‘IMHO whatever the Greeks decide this week they should be supported by EU members who should not forget what the real objectives of the European Project actually are.’

Sarkozy’s concept of the European Project is to funnel European capital via Greece into private French banks. Spose they’ll contribute a few bob to his fruitless re-election campaign; as Greeks continue to suffer under the ECB occupationary forces.

Steinbrück and Weber are not alone in their frustration …


“Greeks may have to call out tanks”

– This really annoys me. The size of the protest is quiet small 10,000 to 15,000. Wait until it hits 150,000+ before typing wide of the mark posts from a cubicle or kitchen table somewhere in Dublin.

Whenever events heat up a bit a whole army of tin foil heads appear on the scene. Read: even if Greece defaults it’s not the end of the world.


“This really annoys me. The size of the protest is quiet small 10,000 to 15,000. Wait until it hits 150,000+ before typing wide of the mark posts from a cubicle or kitchen table somewhere in Dublin.”

You obviously did not read the post or entirely miscontrued it. It merely quoted the deputy PM say he may have to call out the tanks to guard the banks against a run.
As for the size of the protests I am watching from a more informed location than the one described by you.


Even before doing any sums the basic outcome is known in advance, since the rules of the game are to avoid a ratings downgrade, which means the banks must be no worse off financially than if they just took their money from the upcoming redemptions and walked away. So the banks will either break even or make a profit.

The diagram conveniently omits the bit where the Greeks get the money to pay back the Investors in the first place – i.e. borrowed from the EFSF. I figure that the net position of Greece is, for every €100 rolled-over in this way

– owes €50 to the EFSF (at about 5%)
– owes €70 to the Investors (at 5.5% plus up to 2.5% GDP-index linked)

So Greece owes more than it did before, and the average interest rate being paid is higher than before (which is apparently 5.15%).

In effect the Investors will claim that they are lending to Greece at the “market rate” which is about 11-12% for 30 yr. If they invest the €30 cash-out portion in German bonds they’ll get 3.5%. Plus 5.5% from the money loaned to Greece. Plus something between 0 and 2.5% from GDP-growth. Plus they are guaranteed their principal back (don’t know how to calculate how much this is worth in interest rate terms). And the Investors can assume for the moment that the EFSF will continue to lend money to Greece to make the coupon payments. And after this watch for the SPV to start getting money from privatization to guarantee the coupon payments. And watch for the remedies if Greece doesn’t abide by the conditionality (i.e. “Greece respects its committments under the program”).

The way I see it is that the plan would get Greece to fund itself at market/distressed rates, to kick the can a bit further, but makes eventual resolution even more difficult.

The really frightening this is not Greece defaulting but Greece getting through this round.
A lot of genies have come out if a lot of bottles. Mainstream figures are openly discussing defaults and Euro exits. Bailout is politically very contentious in Germany and France.
The Greeks will scrape through this round. It’s whoever comes next that’s going to have a real fight on their hands.
Wonder who that could be??!!

One correction to my previous post. Since any particular pot of money would either get the German interest rate (of 3.5%), or the Greek interest rate, but not both together, I overstated the case a bit. However I think the general point holds.

Also it seems it is OK to “insure” investments against principal loss with zero-coupon bonds, but not OK (if you are French) to do the same with a CDS. Guess you have to be French to see the difference.

@Bond Eoin Bond/ @ALL:

The Greek plan as “explained” is still all Greek to me.
Could somebody explain it in plain English.

@Kenny K
You mean those German made Greek tanks
They are a major purchaser of the Leopard II MBT.
But seriously no one is asking themselves what is going through the minds of the Generals and indeed perhaps more importantly the ranks.
The Greek state have the highest number of active troops per thousand in Europe standing at 15.72 using 2008 wik figures (although Cypriot forces are perhaps marginally higher for identical reasons)
Ireland’s ratio stands at 2.35 for comparison.
A very large section of the population knows how to fire a gun.
Just saying.

@The Dork of Cork

Not to worry: no sign of a Turkish invasion these days. To add to Greek woes, Macedonia is claiming Alexander the Great. Does our Minister also have a Leopard II MBT?

@Joseph Ryan

I expect a ‘plan’ to behave like a ‘plan’ – and a plan usually has some class of a possible endpoint. Dont’ see one here – more debt on unsustainable debt – little nationalistic fudges on the side such as priviliging French banks, all spreads go higher, fingertips on the edge of the cliffs – until the next cliff …. crisis management at its most indecisive, further fracturing of sense of being European, and the Big Big Black Banking Hole at the centre of this mess still ravenous and devouring serfs left, right and centre. It needs plugging pronto.

I was not so much musing about Turkey although I believe that situation could change if the US loses its grip on the Middle east.
No what I was thinking was the different structure withen Greek society – it is still a highly militarized country with a draft call up.
This creates a cultural dynamic which is alien to a Irish state that has lived under a RAF umbrella for decades.


You can’t say things like that on an Irish Blog. Next you will be claiming that countries like Ireland and Germany have freeloaded on the back of the US and UK for decades.

Dreadful. Repent.

Yes the Irish citizen must forever remain in the foetal position – sorry about that.

@The Dork

That RAF umbrella could be useful yet if and when we get that ‘no fly zone’ on all those ECB bonds … The RAF has a bit of .. er .. form with Frankfurt.

All this talk of tanks and troops…

Greek soldiers would not fire on their own people in this day and age. It would be interesting to find out if the austerity had been spared for the police and military in Greece though. Politicians knowing who they need to keep close and loyal to them and all that. Sqauddies moan a lot anyway but if you cut their wages they really moan.

Does anyone know if the police and troops over there have had a pay cut?

As for the question about whether Ireland has any tanks….. slurry tanks?

Given the gun they have to their heads, it’s hard to see the Greek parliament voting ‘no’ tomorrow. ‘THWANK’. That’s the sound of a can being kicked down the road. I expect the protests to get noisier tomorrow.

Follow the Merkel. It’s hard work I know – we’ve had at least two flip-flops on the pre/post 2013 bail-in “rules” so far.

A few weeks ago, she – through her mouthpiece Shauble – was all for punishing the reckless investors who funded the feckless Greeks (as opposed to the German banks ….er… bondholders of….. er, Irish ….. er, banks, er……)

However, forces beyond her control have crunched together two non-negotiable positions – 1) the German red-line of ECB independence, and 2) the ECB red-line that there should not be a Greek default.

Right now, the ECB has frightened her so much – Greek meltdown, capital controls, euro-exit, contagion, etc – that she is willing to face down the domestic hard-liners, for a while at least.

So the almost tragic conclusion is that provided Greece agrees to and receives the new funding package before Merkel changes her mind again, there won’t be a default. If she does change her mind, there probably will be a default.

This is 21st century state of the art financial management, euro-style.

The Dork of Cork:

This creates a cultural dynamic which is alien to a Irish state that has lived under a RAF umbrella for decades.

DoC, I do not want to encourage trolling but that is the craziest thing you have ever posted.

This is not to discount the dangers of a military coup in Greece, it has happened there before in the glorious struggle to protect private property against the popular will, however Ireland’s differing attitude to the use of force might be because we never got sucked into NATO, wasteful western militarism, counter communist military coups or the attendant general immorality of the cold war rather than our lack of a Bomber Command.

Assembly in Square outside Greek Parliament : Address to Police etc.

Just to note, that (like in Spain when squares were occupied all over the country a couple of weeks ago) the Square in Athens is only one square and that assemblies of citizens are taking place continuously in many towns and cities around the country – and these squares are all networked. The social movement rejecting austerity and the IMF bailout and sell-off is massive. It is not being represented in any accurate way by any mainstream media I am seeing.

@ Eureka

“While Enda has been cracking bad jokes with Sarkozy the demise of the Euro is becoming all too clear. It’s each country for themselves now. Germany will be ok and France not too bad. We’re in for one hell of a rude awakening.”

Actually, it’s not at all clear that France & Germany will be okay vis a vis everyone else.

First things first. Germany’s banking system is the world leader in dodgy investments. Bafin back in 2008 put the losses in their system at about 30% GDP. It was a report that Ambrose Evans Pritchard picked up on in the Telegraph, but everyone else declined to report. Not only that, but Deutsch was (and maybe still is) the world champion issuer of derivatives. I’d say they could be in one mighty tangled mess.

Second. History suggests, that creditor nations with trade surpluses suffer the most when default becomes widespread. Look at the 1930’s. Comparatively speaking debtor nations are home free.

Third. If Spain, Italy and Belgium, all get pulled in, wither the euro. I for one would shed no tears. In fact, I can’t see another way out of this.

Simon Twist on the ULA thread, posted a link to Bill Mitchell’s post on us.

He quotes Krugman:

“Unemployment is a terrible scourge across much of the Western world. Almost 14 million Americans are jobless, and millions more are stuck with part-time work or jobs that fail to use their skills. Some European countries have it even worse: 21 percent of Spanish workers are unemployed.

Yet a strange thing has happened to policy discussion: on both sides of the Atlantic, a consensus has emerged among movers and shakers that nothing can or should be done about jobs. Instead of a determination to do something about the ongoing suffering and economic waste, one sees a proliferation of excuses for inaction, garbed in the language of wisdom and responsibility.

So someone needs to say the obvious: inventing reasons not to put the unemployed back to work is neither wise nor responsible. It is, instead, a grotesque abdication of responsibility.”

About ourselves he says:

“Public debt ratios do not scare me. Rising budget deficits do not scare me.

But the job destruction rates in Ireland really scared me when I started to dig into the data. They tell me that the labour market is being severely damaged and the path-dependency will be profound and long-lived. The destruction of jobs at the rates that the Central Statistics Office has calculated are without exception. Given what has happened since this data was compiled – as Ireland endures its fourth year of economic contraction I can only conclude that the costs of this destructive policy choices are so great and so permanent that the costs involved in exiting the Eurozone would be dwarfed.”

I recommend reading it in full.

I never thought I see myself agreeing with Euroskeptic Brits, but credit where it’s due, on the euro they’re bang on.

disgruntled observer:

I never thought I see myself agreeing with Euroskeptic Brits, but credit where it’s due, on the euro they’re bang on.

It causes me less mental anguish if I think of it as Scandinavian Euro scepticism but I find myself in the same position.

We are perhaps unlucky that the current global financial crisis arrived at a time of Christian Democrat political hegemony in the larger EU countries but on adopting the Euro and the ECB’s remit, intent and allegiances we had all the history and theory we needed and ignored them.

Lets face reality – The Brits allowed us to play our little Republican games as long as we paid tribute via holding British Bonds.
We gained a free defence & free movement of Labour – the North was / is a very nasty complication.
The “independent” central bank gained later was a European vehicle set up for the change in banking dynamics of the post 70s world.
We have to come to terms with the fact that everything we were thought is a illusion.
Ireland does not exist in any real sense , island politics is interesting from a cultural standpoint but nothing more – no country is a island even real ones.
The British imperial culture has always needed to have minimum involvement in cultural affairs as long as tribute is paid given historical resource constraints , the continental tradition has always been more hands on in your face like.
I am not making any moral judgements – I am just seeing reality as I see it , your reality may be different – fair enough.

Greece will get a restructuring and the dénouement will be triggered in coming years by the IMF pulling its mission out of Athens as the political elites continue to squabble for advantage rather than agree on reform.

There are rumblings already from key IMF members about the Greek mission and apart from the likelihood of little progress from the bureaucrats, at some point, the physical safety of officials may come into play.

Olli Rehn says there’s no Plan B but at some point, the permanent crisis in the EMU because of problems with a few small members is likely to trigger a move to provide for the ejection of member countries.

The point will come where there will be a consensus to let Greece have its sovereignty back and its own currency.

What’s the point of outsiders taking responsibility and blame?; Greeks responsible for sorting out their own mess may bring the reality of a failed state into focus.

As for the euro, China has again this week reaffirmed its commitment to the world’s second reserve currency.

@ Shay Begorrah

We are perhaps unlucky that the current global financial crisis arrived at a time of Christian Democrat political hegemony in the larger EU countries…

Peer Steinbrück as finance minister was no Santa Claus – – neither in policy or personality.

Socialists/social democrats would have faced the same challenges of rising public debt.

This is priceless…courtesy IT
“With the first of two votes expected this afternoon, European Council president Herman van Rompuy said the coming hours would be decisive for the Greek people, the euro zone and the stability of the world economy.

“The more unanimity there is, the more unity there is, the better for the people of Greece and our future,” Mr van Rompuy told the European Parliament in Brussels.

@ Michael Hennigan

“As for the euro, China has again this week reaffirmed its commitment to the world’s second reserve currency.”

They would say that wouldn’t they.

@ Dork

“Lets face reality – The Brits allowed us to play our little Republican games as long as we paid tribute via holding British Bonds.”

Interesting theory, but Conor Mc Cabe makes more sense.

There was a requirement to hold British bonds to maintain parity with sterling. This served the interests of live cattle exporters. Another illuminating thread is WHAT THE HELL HAS CATTLE TO DO WITH NAMA? Curiously enough, there was an Ibec around then, (an American consultancy firm) which was utterly bemused by our policy.

For anyone whose interested and who hasn’t come by Dublin Opinion yet, I’d recommend it, in particular the thread ‘There are certain limited funds at our disposal. People may have to die in this country, and may have to die through starvation.’ This is a quote from Patrick McGilligan, the minister for Industry and Commerce in the Cumann Na nGaedheal government. This was in 1924. At the time £250,000 was set aside to give grants to home builders and middle class families. The more things change…

@ All

anyone done the maths on the Greek “French rollover” plan?

Headline coupon on Greek bonds under this proposal is 5.5%, plus up to 2.5% in GDP linkage. However, Greece will only get 70 cents on every 100 cents issued, 30 cents being held back as collateral. So this increases effective coupon to 7.85%, plus 3.5% in GDP linkage. ie potentially up to 11.4%. Are my maths right? Seems insane.

@Mickael H,

“Greeks responsible for sorting out their own mess may bring the reality of a failed state into focus.”

You have put your finger on the fundamental problem. Once the Europe ‘project’ had achieved its initial major objective of binding together the former antagonists among the founding six members, the project expanded to bring in those who had suffered various forms of dictatorship, misgovernance and underdevelopment (Ireland, Greece, Spain and Portugal). It also brought in, over time, broadly well-governed but vaguely sceptical countries (the UK, Denmark, Sweden, Finland and Austria) and supported the unification of Germany. All this was achieved on the basis of fundamental principles of democratic governance and the rule of law – enlivened by the Delorian objectives of competition, co-operation and solidarity. This provided the basis for incorporating the former Warsaw bloc countries and the smaller Med islands. It continues to provide the basis that attracts the remnants of Yugoslavia and encourages reform in neighbouring countries.

If a member-state, in this case Greece, is ejected from the inner sanctum, the Euro Area, the project has failed. This is the dilemma confronting Pres. Sarkozy and Chancellor Merkel. Do they, individually or jointly, put the ‘project’ before their chances of re-election; or do they continue to kick the can with the ‘project’ in the hope that something will turn up and bolster their re-election chances.

It is as simple and brutal as that. Europe or re-election, with huge uncertainty attending both.

I question your math, with some trpidation. IS the cpn not 5.5% plus GDP kicker on the 50 cent roll over. The 20c in E**** 30 year zeros but rolling up at a ???? rate of say 4% plus (roughly where the OAT 30 year yields). Call it 4.5% for round. So that be 5.2% weighted. In addition, I assume the 30 that is rolling off gets funded at Official rates…call it 5.7%.

Call it all in 5.3% -5.5%, However, you are ususally more correct on these matters than me.

@Bond.Eoin Bond.

Simple excel based on your assumptions says 11.4286%.
I don’t understand the proposal though.
Creditors gets 30% up front.
Plus for the remaining 70% not paid they get the following:
New Greek Bonds at Nominal value Euro 100 at interest rate 5.5%+2.5%max.
Plus it would appear 30%? of the new bonds (30% of 100%) as collateral AAA bond for the balance of the 70% reinvested.
A hell of a good deal if you believ that there is the slightest chance it will be paid.

A seperate note: How could anybody seriously believe or trust in aany party that produced the following gobbledygook as a serious proposal. They should try to explain it to themselves first before they foisted it on a public sick to the back teeth deliberate complexity to hide what appears to be another rip-off.

Option 1: 30-year financing to Greece principal-guaranteed by SPV
Participants will invest a minimum of 70% of the principal amount of proceeds received (the “Received Amounts”) in new Greek government bonds, resulting in a net debt financing of at least 50% of the Received Amounts for Greece, as described below (the “New GGBpg”):
 Government bonds issued by the Hellenic Republic with a maturity at issue of 30 years;
 With a full principal guarantee by an SPV collateralised by zero-coupon bonds purchased from one or more AAA-rated sovereigns, supranational institutions or European agencies (the “Collateral”);
 Bearing interest at a rate of 5.5% plus the yearly Greek GDP growth capped at 2.5% and floored at 0% per annum ; and
 Listed on an EU regulated market, but with restricted trading in the New GGBpg until 1st January 2022 .

What a load of unjoined up rubbish.

French proposal would give 5.5%+2.5%=8% on €100 =€8 for net €70=11.4285%??.
Well done Sarkozy. Way to go. Maybe he wants the Elgin marbles for the Louvre as well.

@Edgar Morgenroth

“The French proposal is of course only in the interests of France”.

How cynical, Edgar.

Can’t you see reality the way it is clearly perceived here?

After graciously persuading the rock solid French banks to save Greece, part of France’s responsibility as equal partner with Germany in the European economic and financial “moteur”, France is today sending its ex-Finance Minister to globalise the solution that is being successfully “Europeanised” even as we speak.

Yes. These spendthrift peripherals, some of whom have been fiscally dumping on us for years, have created huge problems which, through Herculean efforts, we’ve weathered better than any other European economy while having to run the G8 and G20 at the same time, but this whole crisis will be sorted out now that there’s a steady hand at the IMF. N’est pas?

@Paul Hunt

I think you consistently overestimate the importance of the European problems in the French and German electoral campaigns. Unfortunately ,Europe and foreign affairs in general have a very small part in campaign programs in France (except from the extreme right and extreme left which are strongly anti-European) .The socialist party and the Sarkozists programs are virtually identical on European problems.
In this blog there is a tendency to interpret the French and German attitude towards the peripheral countries to domestic politics which is clearly exaggerated. The factual importance of it is also overblown, for example a total default of Greece would mean that the 4 biggest French Banks ,would have a pretty bad year, absolutely not that they would face an existential threat .
Personally ,I regret the lack of political courage and the selfishness of the French and German government in this crisis ,but you have to admit that the Greek ,Irish and Portuguese governances are much worse.


I figure your maths are correct. A comment to the FT article that you linked to has the same calculations. There’s a clever trick in the way the proposal is presented which hides the true interest rate, and the true amount being rolled over by the banks.

After the rollover, banks have reduced their exposure to Greece by 50%. The simplest way to organize the deal would be to say that of €100 of maturing debt, the banks get €30 to do with as they please, and €20 which they will invest in a AAA zero-coupon. There is absolutely no exposure to Greece with this €20. The banks could invest it with Paddy Power for all the difference it would make to Greece. Then they invest the remaining €50 in 30 yr GGBs.

The problem with this is that the headline coupon rate would be high (i.e. 7.85% as a base). Also the rollover ratio would be low (i.e. only 50% of the money being reinvested). The “trick” is to regard the AAA zero-coupon money (or Paddy Power money) as comprising part of the money being invested in “new Greek government bonds”. This makes the headline interest rate look better at 5.5% and the rollover percentage looks better at 70%. Thus while the coupon is 5.5% the yield is 7.85%. Allowing for the GDP kicker the yield ranges from 7.85% to 11.4%. If the actual yield is in the middle of this range then it will be below the current GGB 30 yr market rate of 11.5%.

However this security isn’t actually a “bond” – it is an annuity, i.e. Greece pays the interest, but there is no principal payment at the end. The banks are buying two securities – one a zero-coupon 30 yr bond from a AAA issuer (or Paddy Power if they so choose) and one a 30 yr annuity from Greece. I suspect there is some formula for comparing the credit risk on annuities vs bonds that might bump up the effective yield a bit higher so that the banks can say, “Hey, putting aside the convoluted structure we came up with in order to get good press, we’re basically cutting our exposure by 50%, and what we are investing in is at market (or near-market) rates, so there’s no need for a ratings downgrade”. The ratings agencies will probably agree.

@Paul Hunt

I wouldn’t characterise Finland or Austria as sceptical. Their late accession to the EU resulted from treaty-enforced neutrality as part of their peace deals with the USSR after WWII. They joined up as promptly as they were able upon the demise of that country.

The history scepticism in the UK is closely associated with the special and unequal circumstances in which it joined, specifically with the EU fisheries policy which was devastating to that industry in Britain. French hostility to British involvement resulted from perceived sleights while the country was under German occupation and denied a seat at the top table during WWII. By contrast, (Bourbon-) France had bee fully involved in the Vienna conference at the end of the Napoleonic wars, a shrewd move by the victors that laid the foundation for a lasting (if reactionary) peace.

Both the UK’s humiliating terms of admission and its subsequent disruptive behaviour show for how long the exploitation of minor and transient political advantages can continue to generate negative consequences for the supposed winners.

Ireland, Greece and Portugal can be assumed to be new political allies of the UK from now on unless there’s a dramatic change of policy in Paris. Sensible French politicians wishing to further its genuine, long-term interests should follow Steinbrück’s lead.

@Overseas commentator,

Guilty as charged, but, in some respects, I think you concede part of my point. Even limited misgovernance by the big and powerful makes the legacy of woeful misgovernance by the peripherals ‘project-threatening’. And I think you under-estimate the widespread popular antipathy in the core to any sort of ‘bailout’. The attitude seems to be: ‘We paid to bring these countries into the family when they were poor and unkempt. We expected they would behave – and were assured they would behave responsibly. Why should we pay again when they have been totally irresponsibly?’

There is also a general, but poorly-defined, discontent that decisions were taken over the heads of voters by elites coupled with an assurance that all would be the best of all possible worlds and that they didn’t need to worry about these complex matters. The demagogues are channelling this unease in all sorts of ugly ways, but this doesn’t mean it doesn’t have a legitimate basis.

Granted Chancellor Merkel is not facing this ugliness in the form of a serious formal political threat – it appears the FDP has become the lightning rod for much of this unease, but, despite much common ground with the SDP, I expect she would prefer to be rid of the FDP, avoid the Grand Coalition of 2005-09 and align with the Greens. And a Bundestag election could take place before 2013.

Pres. Sarkozy is facing the distinct possibility of ending up in 3rd place in the first round next year because he is confronting a cleverly-packaged anti-bailout, Europesceptic political force.

I remain convinced that both leaders are seeking to square the requirement to sustain the ‘project’ with a desire to secure re-election.

@ Tull

aha, i see what you’re on to there. I didn’t factor in what they actually earn on the 30% collateral, assumed nothing (ala the current EFSF).

So the Greeks pay 5.5% on the whole lot (plus GDP kicker, but lets ignore that for simplicity’s sake for now), some invested in EFSF-zero, some for general usage.

Example (as i now see it and having discussed it): 100bn bond redeems, Greece pays 30bn cash, pays 70bn in new 30yr GGB bonds. These bonds pay annual coupon of 5.5%, and they borrow 30bn of cash from EU/IMF at 5.5%. All debt rolled over (100bn vs 100bn). Coupon on new debt 5.5%.

Now Greece has to put 30bn cash into a zero coupon EFSF bond, so Greece needs another 30bn of cash. It borrows another 30bn at 5.5% annual coupon from EFSF (so 60bn in official borrowing vs 30bn in official investment via zero-coupon).

So, on the original 100bn redemption, they now have 130bn gross debt, and 100bn of net debt. So net debt the same, but paying 5.5% on 70 + 30 + 30 = 7.15bn/7.15% on 100bn of net debt. Private sector now lending 70bn versus 60bn new official money?

The NPV on a Greek govvie yielding 5.5% for 30yrs, but with principal protected, is roughly 75 cents. So banks take 25% hit vs par, but cost defrayed over 30 years, so 0.8% pa, and actually more like 0.65% when you discount the loss over the life of the bond.

Note: I THINK! Its seriously complicated, and market still trying to get its head around the metrics on all of this in terms of NPV.

There is a mechanism for restructuring, it is called default.

In a default the debts are written down AND there is a period of austerity. Again it seems that there are people who think they’ve found a magical solution to an unpleasant problem. Write-down of debts can easily happen, however, the price to pay (instant balancing of budget) is deemed to steep.

Would leaders who blocked a continued funding of Greece get a boost in their popularity rating or would their popularity ratings drop?

Countries, like people, can find themselves in unions they are not suited for. If the differences are irreconcilable then a divorce is the best solution.

There are countries who’d rather print money to fund their deficit than balance their budget in a conventional way. There are countries who refuses to do so. The ones who’d like to use a monetary tool to fix a fiscal problem should not be forced to stay among the ones who believe that fiscal tools are the appropriate tools to fix a fiscal problem.

At the moment it is not clear if the differences can be reconciled and I have to admit I believe there are reasons to doubt. If the relationship, then it should end. It is not a failure, it is a learning experience & some time apart might cause some longing back to the good old days together.

Sadly we now have leaders who have invested a lot of prestige in painting a picture where an EUR-country default would cause the world to end. If Greece were to default and the world would continue as normal there would be some embarrassed people for a while. Luckily for them, the public memory is usually short.

I remember the reaction when the ECB started buying government bonds. Quite a few were very, very enthusiastic. My personal opinion is that the decision was a very, very bad one. Who remembers who thought this decision was a good one?


It’s difficult to capture individual members in a general comment; but I take your point. I also agree with your more profound observation presented in the historical context. The past may be a different country, but we regularly underestimate the extent to which we may be its prisoners. And in that vein, it might not be so surprising that the first colony to leave it in the 20th century, the first country it sought to extract from the Ottoman empire and its oldest ally would consider some alignment with Britain against the continental powers.

@ Tull et al

should be noted, they pay 7.15% per annum coupon on 100bn of new net debt, and then get a principal kicker on the 30bn zero coupon in YR30 to offset that (which on my back of the envelope maths means a redemption in favour of Greece in YR30 of close to 120bn: 30bn P + 50 I + Compound I). If anyone is still alive at that point.

@ Paul Hunt

You have raised a very interesting point about how countries now view the EU – both from within and without – which was dealt with in a piece by Philip Stephens in the FT recently.

The point that he omits to mention is that the UK has never viewed European construction as going beyond that of cooperation between nation states, the concept of which came into existence with the Peace of Wesphalia.

However, to paraphrase Monnet, “nothing is lasting without institutions and nothing is possible without men and women of talent to run them”. At the moment we are lacking the latter, but the first are still in place. Cameron, with his various sovereignty initiatives to placate his right wing, is trying to unpick the UK’s involvement with the first. But therein lies the irony. The institutions draw their legitimacy from participating democracies that function well and the UK is in that category. It has a track record of implementing EU legislation which far surpasses Ireland (as have, of course, the other late arrivals who got on the train when they saw that it was actually going to leave the station).

What is profoundly depressing is that the founding partnership of France and Germany is governed by such political nonentities at present. Neither leader has any grasp of how the institutions are supposed to function. Nothing could underline this more than the fact of their failure to agree with the European Parliament that, in relation to breaches of the Stability and Growth Pact, action should be automatic and removed from political manipulation by the larger countries (as happened so disastrously under Schroeder and Chirac).

The malaise stretches into every corner. By all means, Ireland should defend its low corporation tax rate, but to elevate it into a plank of national economic policy, copper fastening a two-speed economy, reflects a failure of analysis and a capacity to think things through.

On popular sentiment, I would be optimistic. The tilting at windmills may continue in academic debate but, when push comes to shove, there is a national recognition that a lot of what the EU legislation forces us to do is for our own good. A recent example would be the pressure to clean up our act, if I might use the phrase, in relation to the proper maintenance of septic tanks.


sounds like one of those Eddie Hobbs solutions, pay off your credit card with a 30 year mortgage over 30 years.

@Paul Hunt
There is an anti-bailout sentiment in part of the German press, but absolutely not in the French press or the French public opinion, mainly ,they do not care.
Marine Le Pen is anti-bailout and Europesceptic but it is not central to her message ,being a fascist populist she has to be against Europe but she is mainly anti-immigrants, anti-moslems ,anti-blacks and anti-arabs. There is no political gain to be had by being anti-Greek or anti-Irish. The Portuguese are very popular in France due to the large Portuguese immigration which is totally assimilated in the French culture.
I doubt that the FN can come second in a presidential election. The last time it happened the circumstances were very different. Do not under-estimate Sarkozy ,he is a much better campaigner than president.
I am afraid we are straying from the subject of this blog, pardon me.

There are so many seemingly off-hand comments here and elsewhere along the lines that the Euro will implode and/or a member state will be forced to leave.

What I don’t understand about this is that it is the most extreme possible solution to the current chaos, and yet it seems to be the next inevitable step in many people’s minds. Why?

For example, why would that be a more likely thing to happen than money printing? Why would Euro leaders go for the nuclear option when far less painful solutions exist? Indeed, fear of contagion is one of the main concerns at the moment, and yet people think that Euro politicians would force a Greek Euro exit despite the fact the contagion and unforeseen consequences of that are likely just as high and in many ways much more scary so unknown are they.


That ‘plank of national economic policy’ is of course the very stick with which Nicolas Sarkozy not unreasonably beats the country. Modifications to the country’s tax policy with such implications could not be considered for the crumbs Sarko was offering of course, but FG/Lab blundered when they explicitly moved the CT rate off the negotiating table before discussions had even begun.

@Eoin & Tull
The 30-years will have bigger collateral haircuts at the ECB (and one presumes in the repo market?) than lower duration debt. Will that be offset by less or more than an uplift in the rating of the debt? Any idea what rating the new debt would have?

Is there an extra gain or an additional loss hiding in this?

What’s the current interest cost on Greek debt? I heard somewhere last week that the Greeks had eliminated the structural component of their fiscal balance – that the budget deficit could be entirely put down to interest costs. If this is the case, does the plan not call for increased levels of interest payments? Surely this will make the Greek fiscal situation worse, not better?

@Overseas commentator,

If we are straying, I should accept the blame and not you. But as, DOCM, has noted, I am seeking to focus on Ireland’s strategic positioning in a Europe where the governing elites have forfeited the democratic legitimacy to address problems (in the context of the peripheral economies) that are neither large nor intractable. And they lack the nous and calibre to re-secure this democratic legitimacy. Peter Steinbrück’s intervention smply highlights that the problem is neither large not intractable; it is simply very difficult for politicians who have misled their voters and are seeking re-election.

@ Hoggie

5.15% i heard touted as the average coupon on their 157% Debt/GDP, so that’d be an interest servicing cost of 8.1% of GDP? Which would make sense with a something close to a structural balance (i think the assumption was that Greece would eliminate the structural deficit this year, but this may have been revised back given fiscal targets not met).

But yes, thats what i saw out of it too – worse cashflow/deficit position, and no solvency improvement. Basically just a liquidity guarantee.


“On popular sentiment, I would be optimistic. The tilting at windmills may continue in academic debate but, when push comes to shove, there is a national recognition that a lot of what the EU legislation forces us to do is for our own good. A recent example would be the pressure to clean up our act, if I might use the phrase, in relation to the proper maintenance of septic tanks.”
actually has the opposite effect on popular opinion in the Nordic countries.

There are management paradigms about that decisions should be taken on the appropriate level and the above is a clear example of something that should be dealt with at national or even local level. Justifying the cost of the Brussels bureaucracy by examples such as those simply does not work.


worse cash flow but better than the alternative of not being abel to roll over any debt with private markets. It does nothing for solvency. Bit left foot boot down the road past the French PRez election by Sarko. Greek default is now SEP, that is the plan.

It is a good deal for the French Financial Institutions. They have got back 30% of the Greek at par. Moreover, of the 70% that is rolled some of it will be guaranteed by a better class of taxpayer. No idea what level of provisions or what level of equity the rollers will have to hold against this SPV.

@Paul Hunt, DOCM, Overseas commentator

Once a faction has established a political narrative it frequently finds itself a prisoner of its own rationale. There are many instances of this historically but one outstanding example was the Confederacy’s claim to be acting in defence of “states’ rights” in the US Civil War.

Having constructed this interpretation of the dispute, it found creating a functioning central government difficult. The result was a peculiar decentralised yet increasingly authoritarian regime. While the CSA fought for its existence at Bull Run with every soldier it could muster, even larger forces were lying idle under state command in Georgia, Alabama etc., all hundreds of miles from the nearest enemy soldier.

If Jefferson Davis could find himself entangled in his own spin even during a desperate crisis, France and Germany will find it much harder to extricate themselves from what is largely a synthetic crisis. This is the very trap which Sarkozy and Merkel have set for their countries and already it’s becoming apparent that they’ve curtailed their own room for manoeuvre.

@ BEB, Tull et al,

On French proposal, who takes the greek default risk? The role of the guarantor isn’t fully explained in the French 3 page doc (on alphaville). In particular, what happens if Greece defaults in the near term – do the 30yr bonds receive coupon til maturity?

Ignoring the reality that the French banks could redeem their existing Greek bonds, why do the French banks get to roll on losses to the EU whereas Irish banks didn’t. Applying Mr Bini/Danny G. logic, shouldn’t it solely be the French government that provides this guarantee.

“worse cash flow but better than the alternative of not being abel to roll over any debt with private markets”
Worse for who? 😀

@Ahura Mazda
“shouldn’t it solely be the French government that provides this guarantee.”

Michael Hennigan on the perils of Christian Democrat hegemony.

Socialists/social democrats would have faced the same challenges of rising public debt.

Can I say “Yes, but…”?

Would it be fair to say that the Christian Democrats have a political base that has traditionally had more savings/investments and because of the current “EU of the ruling national political parties” this has mitigated against a solution that involved a softer Euro and has prioritized the interests of the investing classes over those more dependent on the state for their welfare?

Perhaps if we had political parties in power who saw the role of the state as protecting democracy from the flaws of our current flavour of capitalism rather than protecting our current flavour of capitalism from the the flaws of democracy (a la the ECB) we might have had a different set of policies, a different allocation of pain.

This is a thinly disguised default,nothing that the banks management can brag about to their shareholders. Irish commentators should hope that it will succeed ,so as to establish a precedent that can be applied later to the Irish sovereign debt.
I doubt it will work .It does nothing to restaure Greece competitivity (in case that there ever was such a thing!).

@ Adrian Kelleher

The historical example you give is a good one and the description of the current crisis as synthetic equally so.

@ Overseas commentator

The point you make about the difference in attitudes in France and Germany is completely overlooked in the debate in Ireland. There is a mistaken assumption that a Franco-German axis exists when nothing could be further from the truth. Evey effort made by France to find an exit at an earlier stage in the crisis has been frustrated by the political stand-off in Germany, the “troops in Georgia and Alabama” i.e. solutions such as the issuance of eurobonds, guarantees etc. being kept unavailable in order to defend an impossible principle: no bailout, and eventually being released in dribs and drabs in a manner which is unlikley to have any impact on the outcome of the battle.

@Ahura Mazda
“shouldn’t it solely be the French government that provides this guarantee.”

Yes, but in the interests of EU solidarity, it should be mostly the Germans. Frau Merkel exacerbated this crisis so I think its only fair that the German taxpayer should pay.

How do ya do the wink wink emoticon.

The rare moments when Europe was moving forward were those when the Commission ,the German and the French government were pushing in the same direction. Presently the Commission is non-existent ,the French government is scared stiff of the precedent of the French “No” to the 2005 referendum and the German are in the midst of a period of hubris during which they think that, if only others were as virtuous as they are, everything would be fine (a world where every country would run a trade surplus and a saving rate exceeding any investment capital needs).
Maybe in 2013 there will be a Belgian government, Berlusconi will have retired and the Germans will know what they want, until then let’s be patient.

Looks like the crisis is over…for now. Reuters reporting the rating agencies and the CDS guys are going along with the plan.

“”(The plan) will be seen to comfortably not trigger the CDS … the issues with the rating agencies and accounting are far bigger,” the person said.

Banks have also received positive signals from ratings agencies that they will not call the French plan a default, clearing a second important hurdle that could have scuppered the debt renewal plan.

Please respect’s ts&cs and copyright policy which allow you to: share links; copy content for personal use; & redistribute limited extracts. Email to buy additional rights or use this link to reference the article –

“Wednesday 14.30 BST. Market bulls have got what they wanted after the Greek parliament passed a package of austerity measures designed to secure further bail-out funds.
The FTSE All-World equity index, up 1 per cent, has rebounded 2.5 per cent this week in the belief that Athens’ acceptance of the European Union and International Monetary Fund’s loan conditions will cut the chances of a Greek default and reduce eurozone sovereign debt contagion fears.
Discussions between European banks about rolling over Greek debt has also convinced some investors that the financial system can avoid – or for the sceptics, put off for now – a damaging hit to balance sheets as Greek IOU’s are restructured.

Credit markets tell a different story. True, spreads between “peripherals” and Bunds have shrunk of late as contagion fears recede a touch. But Greek 2-year bonds are still yielding 27 per cent and the country’s 5-year credit default swaps are 1,900 basis points compared with Germany’s 45bp. “

@ Overseas Commentator

I do not think that we can afford the luxury of being patient. A point worth considering in the context of this particular thread is the fact that the Socialist parties in both France and Germany have succeeded in writing down a fairly impressive common platform. Of course, there are references in it to the issue of taxation which will have a supposedly like-minded Irish party jumping up and down but, overall, it is rather impressive.

Steinbrueck, of course, having served as fiance minister, knows all the dossiers intimately and, in particular, those relating to where the party went wrong under Schroeder. And the French presidential election is only a short time away.

The declaration is available in French and German on the respective party websites. I cannot track down an English version.

As it stands the Socialist Party program would explode the deficits ,after the campaign ,it will be much worse.

I’ve taken a second look at the French Proposal. It lacks detail on the guarantee, but the way I’m reading it makes me think this structure is inferior to the existing EFSF for the guarantors and the Greeks. I think the key difference between the EFSF and the French proposal is the cost of funds. The EFSF borrows at c.2.8% whereas the french proposal borrows at 5.5% (though there is a duration mismatch). It’s a bit pricey just to get private sector involvement (which isn’t true private sector involvement.

The bottom line is this does nothing to ease the Greek debt burden; in fact it increases it.

(to answer myself on my earlier question – in a default principal is repaid immediately so there’s no issue on post default coupons being paid)


According to the pre-election document you linked, for the French Socialist party, the solution to all of this is strong, unified, social, democratic and economic government and governance that will also reorganise financial markets ( in Europe and globally), eliminate speculators, regulate climate change and bring about disarmament and “responsible” peace.

That about covers it, I guess!

@PR Guy

“Greek soldiers would not fire on their people in this day and age.”

I agree it is unlikely but whether the military consider suspending Parliament if they fear instability is not necessarily guaranteed.

I would guess there are a significant numbers of senior (serving and reserve) influential military officers who started their military careers before the last military rule ended.

Consequently it does not stretch the boundaries of possibility that the “contagion” the military leadership may be most concerned about is the social discontent which is spreading throughout the Arab mediterranean. In which case the concerns of a few bondholders , bankers and political candidates elsewhere in Europe would be way down the list of Greek national and security priorities.

IMHO the proposal (which I believe originated elsewhere in Europe) to sell state assets has ruffled the feathers of certain influential sectors of Greek society who normally stay out of the legislative and politcal arena.

I would also guess that certain influential sectors of Greek society are also “bristling” about the apparently arrrogant and superior attitudes emanating from certain parts of Europe which seem to be implying that Greece is in some way a “failed state”.

@ Richard Fedigan

What did you expect?

The importance of the document lies in the fact that it was agreed between two of the major political formations in the two countries that matter most to the EU. It also has elements of real substance, notably the acceptance of the idea advanced by Lagarde last year that “it takes two to tango” and rejected out of hand by the governingg CDU/CSU/FDP coalition i.e. that adaptation on the part of both surplus and deficit countries is required. There is not a mention of this in the Euro Plus Pact. The SDP is also now openly campaigning for the introduction of a minimum wage in Germany.

I could go on. I suggest that you ignore the Utopian elements and look for the indicators of a possibly radically changing European political landscape!


“…. look for the indicators of of a possibly radically changing European political landscape.” ( in the joint French and German socialist pre-election document).

I wouldn’t argue with you but, in an Irish context, you may not have noticed, in item 5.) of the document, the call for the “absolute necessity” of a (European) floor on Corporation Tax and an end to fiscal dumping.

If, in this radically changed European political landscape, Socialist President Hollande ( or Aubry!) of France and Germany are calling the CT shots at a time when Ireland will need to be reassuring the US multinationals that generate the vast bulk of our exports and therefore our growth, we’ll need to get our anticipation in first!

France and Germany united against Irish fiscal dumping! Radical change indeed. For whom?


A lot could change in a year, but I wish I could share your optimism. The Left in the EU is a busted flush. It is locked into defending the interests of the ‘insiders’ with secure employment and its desire to hold this block of votes prevents it reaching out to parts of what should be its natural constituency – and which it needs to secure a popular mandate to govern.

Parts of this constituency have migrated to the populist, xenophobic right (in France) and another part has migrated to the Greens (in Germany). Winning them back will be difficult, but, while it shows itself incapable of advancing the democratic legitimacy of the EU’s institutions of governance and of ensuring the advocacy of the collective interests of consumers against those of pan-European and global businesses, it will have no chance.

It’s all rubbish. You can’t pay what you don’t have.
Amazing how Greece, the home of democracy, should act as the catalyst to reinvent it.
Robbing of the people by the state for the banks – not quite what they had in mind

@ Richard Fedigan

I pointed out in my comment the following: “Of course, there are references in it to the issue of taxation which will have a supposedly like-minded Irish party jumping up and down but, overall, it is rather impressive”.

The world does not have to be viewed through the looking glass of Ireland’s preoccupation with defending its low rate of corporation tax. The defence mounted up to this point, in any case, has plumbed the depths of ineptitude. The treaties stipulate that direct taxes remain a national prerogative and there are many member countries other than Ireland that intend to keep it that way.

Sarkozy and Merkel have no business going outside the treaties to strong-arm another country into changing its direct taxation policies. Whoever is in power in France or Germany will meet the same brick wall. But that is not a reason for ignoring wider, and possibly highly beneficial, political developments in Europe in other areas.

@ Paul Hunt

I would share your analysis. The issue is not, however, in my view, one of left-right politics but of the reaction that the Americans sum up as “throw the bums out”. Whether the bums being thrown out are right-wing or left-wing is immaterial. The recent record of elections in Europe, Ireland included, confirms this. It is more a question of a pragmatic recognition that things are out of kilter and they must be corrected. Aubry is not the best example, as the author of the 35 hour week, which has probably done more damage to France than any other measure one can think of. But here again the wording of the joint declaration is worth looking at.

You are perfectly right, legally nobody can oblige a country to do anything that is not mentioned in the treaties .But it work both ways ,nobody can force France and Germany to lower the interest rate applied to the bailout either .If Ireland needs a second bailout like the Greeks most of the guarantee will have to come again from the two biggest states of the Eurozone. The issue will not go away and Mr. Noonan will have many occasions to demonstrate his considerable negotiation skills.

@Ahura Mazda

(to answer myself on my earlier question – in a default principal is repaid immediately so there’s no issue on post default coupons being paid)

My reading of the French proposal is that the Guarantee/SPV only kicks in if Greece defaults on the principal, not on the coupons. This means that any default would only occur in 2041, and at that time the SPV will have the funds to pay back the full principal amount. The SPV won’t pay out anything before that, since any defaults before that would be on coupons not principal, and there are no guarantees on the coupons. If Greece pays back the principal it gets to keep the SPV money. If it defaults on the principal, it only gets to keep the SPV money after whatever is necessary to make the principal payment whole hsa been taken out. In either case the net position for Greece and the Investors is the same.

In practice I think the banks believe that the EFSF/ESM will keep lending Greece money to pay the coupons. Also I would not be surprised if the SPV was topped up with privatization funds to ‘guarantee’ the coupons on a rolling 12-month basis, for example, but that’s just a guess.

While technically the deal is structured as a 30 yr GGB, with Greece buying collateral ‘behind the scenes’ (from the point of view of the Investors), I believe the deal is financially equivalent to a deal whereby the Investors buy two separate securities – a 30 yr Greek annuity, and a 30 yr AAA-rated zero. This is simpler to understand, but does not have the PR/obfuscation advantages of the proposal (as seen by the banks of course).

I’d say that the deregulation of the finance industry has done more damage to the economy than the shortening of the working week 🙂

@ Overseas commentator

With respect, you are missing my point. The Irish “bailout” is being funded partly (i) by the IMF (ii) on the EU budget (EFSM), on a rather dubious legal base, and (iii) an SPV (EFSF) established, on German insistence, based on Luxembourg private law, outside the treaties. By any measure, there were other perfectly legal anchors in the treaties which could have been utilised were it not for the supposed ogre of the German constitutional court refusing to accept them when it is not, in any case, its job, but that of the European Court of Justice, to decide what is and what is not in accordance with the EU treaties.

A coach and four is being driven through the institutional foundations of the EU and not by Ireland.


My point was that you need two to negotiate , Ireland bargaining position is not as good as you might like it to be.

@Ahura/ @Bryan G/Others :

I am still trying to rationalise the figures on the French proposal, as per the Federation Bancaire Francaise.
Am I correct in outling it as in the figures below?
This is different from others but the is the best that I can make out.
I am unable to follow the other explanations offered.

Exisitng Greek debt = 100
Cash Paid Back = 30 (Greeks Pay)
New Greek 30 year bonds = 70 (@5.5% plus poss 2.5%) (Existing Inv)
Zero coupon AAA bonds = 20 [note 5, €70 @30%] (Gks Pay/withloan).

Therefore the net result is as follows:
The Greeks refinance approx 50%of maturing bonds.
The bondholders get 30% cash plus 20% good collateral, plus 50% junk bonds paying approx 5.5% to 8%.
As pointed out by Bryan G, only the principal of the New GGB’s is guaranteed by the AAA zero coupon bonds. Failure to pay interest on the New GGB’s is irrelevant. The collateral fund stays intact until 2041.

And in 2041 if the Greeks don’t come up with the cash for the then matured €70 billion the ECB (or the ghost of Bini Smaghi) will send its armies into Greece for the collateral.

Net result:
A rolling haircut of 50% potentially on Greek State debts.
The other 50% is being shifted onto IMF/EU in so far as it finances the ability of the Greek Govt to pay the 30% cash and the 20% ( €70 @ 30% par) AAA bonds.

The Irish were and are idiots to pay back bank bonds.
Good luck to the Greeks. They will need it.

Alternative conclusion:
Because the whole scheme is so deliberately complicated, I could have gotten it all wrong. And it probably doen not matter anyway.

And finally Bini Smaghi is not happy:

So we’re back to the so called negotiation…..

The strategy so far by Ireland:
1. Insult counter-party
2. Offer nothing while demanding something
3. Get nothing
4. Learn?

Jesper, are you familiar with the idea of projection?

I ask for no particular reason.

It’s not over until the fat lady sings.
According to the WSJ German bankers are not happy with the Sarkozy solution and want a five year bond rather than the thirty years on the table. They also say that the 20% set aside for eventual repayment will end up costing the Greeks 10% pa.

@Joseph Ryan

While there are a couple of points in your outline that I don’t quite follow, I think the conclusions are essentially correct.

I think a useful simplification is that for the money used to buy the zero-coupon bond instead of

“The EFSF loans €20 to Greece, which gives it to the Investor Bank to repay its maturing debt, which loans it back to Greece, which buys a AAA zero which is guaranteed to be worth €70 in 30 years time, but which the bank can claim no matter what Greece does”


“The EFSF loans €20 to Greece, which gives it to the Investor Bank to repay its maturing debt, which buys a AAA zero which is guaranteed to be worth €70 in 30 years time”

i.e. if you remove Greece from the 2nd-half of the chain, the overall effect is the same.

So then you have the Investor Bank in effect “buying an annuity” from Greece for €50 i.e. getting the income stream for 30 years, but with no repayment at the end, since that’s taken care of with the zero-coupon bond. The total income stream amount demanded by the banks is equivalent to the income stream of a €70 GGB, but they are only putting up €50. This is why the effective interest rate is 7.9% (and not 5.5%) plus the GDP kicker, and this is where the WSJ and other commentators get the effective 10% rate being paid by Greece.

At the end of the day you transform a short-term debt of €100 at current interest rate (approx 5.15%) to a longer maturity debt of €50 to the EFSF at the EFSF rate, and €50 to the Investor Banks at 10%.

BTW there’ll be no need for tanks to get the collateral. It will be stored in the vault in the basement in Frankfurt, so they’ll only have to ask the man with the key nicely to get their hands on it!

@ Bryan G.

Many thanks for that. It makes more sense now.
One wonders why you were not asked to explain it! Or maybe the obfuscation was deliberate.

@ Bryan G

“plus the GDP kicker”

Just obsessing about that bit for a moment. Would you or others, care to expand on what you make of this bit of the deal? I assume it makes the lenders have an interest in Greece doing well? Is it a sensible thing, and/or can anyone see any unintended consequences?

Ok – a few facts:
1: Lending down
2: Unemployment up
3: Number of companies going bust up
4: HSE secretly delighted that NCHD shortage will let them shut hospitals in July

So…what part of…this isn’t working do people not understand?

Only two solutions – 30 year loans at 1% (and linked to GDP) for the periphery or cut our deficit to zero and let the bankers go to pot!

Since the 30 years loans ain’t going to happen – probably only one solution.

@ Joseph Ryan,

Using 100bn to be repaid to existing investors, it seems to me that this is financed 51bn from EFSF and 49bn from existing investors. Nominal aggregate increase in Greek debt of 21bn (49bn from investors but Greece owes them 70bn). The 21bn invested in a zero coupon bond should yield 70bn thirty years from now (assumes c.4.1% yield).

The effective rate on the 49bn is 7.86% (5.5% * 70 / 49). On the rolled over 100bn, the blended rate is 6.66%. So the French proposal increases the current debt servicing burden by 1.16% on this portion of the Greek debt (assuming it replaces EFSF funds at 5.5%). In reality, the increase in debt burden is probably higher depending on the coupon of the existing debt being replaced. Because a GDP kicker is multiplied by a factor of 70/49, it could be quite expensive. Though talking about Greek growth at present seems quite optimistic.

AFAIK, if Greece doesn’t default, after 30yrs the proceeds from the zero coupon bond should repay the existing investors; leaving Greece with 51bn debt. You’ll get various degrees of attractiveness/unattractiveness depending on what sort of future discounts you apply.

If Greece defaults, things aren’t so clear.

@ Bryan G,

I see what you’re saying with regards to default can only occur post 30yrs. The French proposal document would tend to support it in some of the phrases used. Though in others it’s ambiguous.

However I put this down to vague/poor phrasing. I couldn’t see French banks agreeing to a proposal where Greece could default after 6 months and they receive no money for another 29.5 years. It’s more plausible that at default the zero coupon bonds are sold and the shortfall is covered by some EZ fund.

One of the fascinating aspects of this whole crisis is how there is no let up in how bad things get. This was in the Irish Times on March 19 2009, not even 2 and a half years ago.

“THE CREATION of a toxic asset company to remove bad loans from the banks could involve loan write-offs which match or are more severe than the banks’worst-case scenarios under proposals being devised for the Government. Economist Dr Peter Bacon has advised the Government to establish a bad debt company to take problem loans off the banks’balance sheets to free up lending. Analyst Emer Lang at Davy stockbrokers said valuing the toxic loans was the “key challenge”. “The level of writedowns the banks are forced to take will ultimately dictate the capital that is required to restore them to a healthy position where they can function as ‘good’banks, helping to kick-start the economy.””

@Joseph Ryan

Well I think the title of the WSJ article “The French Deception” says a lot! In fact the simplest way to structure the deal would be do exactly as was done with Brady Bonds, where the official lenders (IMF/World Bank in that case) lent the money directly to the debtor countries to buy the zreo-coupon collateral. This would remove the collateral funding from the Investor Bank money stream entirely.

I would hope that behind the scenes the Irish government are doing what they can to kill this proposal. Due to the ground rules enforced by the ECB, it now seems that PSI involvement means “lend more money at market or near market rates”. If the precedent is set that part of the official program funding package includes debt at or near a 10% interest rate, it makes the current debate about the 1% reduction look somewhat meaningless.

@Gavin Kostick

As currently structured, the GDP kicker part makes no sense to me, but without debt restructuring, the whole thing makes no sense. Debt sustainability can only occur if the growth rate exceeds the interest rate, so if you keep bumping up the interest rate in line with the growth rate you’ll never get anywhere. It would make more sense that if growth exceeded a certain level, say 4% that the interest rate could go up by some fraction of this (e.g. goes up 1/2% for every 1% of GDP say), i.e. banks share in gains above some threshold amount. Bumping up the interest rate by 1% with weak growth of 1% makes no sense.

With Brady Bonds there were Value Recovery Rights (VRRs) where if oil revenues, say, exceeded a certain amount, then the coupon payments would increase. This turned out to be an incentive for Mexico to redeem the Brady Bonds early (to avoid the VRR premium) so that if done correctly the VRR concept can work, but I don’t know the details of how this was done,

With the French proposal the Banks have taken all the elements of the Brady Plan that suit them, and ignored or distorted the elements that don’t suit them, so it really a caricature of the Brady Plan rather than a copy of it.

@Ahura Mazda

French officials have been saying that the SPV is not guaranteed by any EU fund, and I don’t think the Germans would allow it to be guaranteed in this way. If coupon payments are missed, I don’t see how the SPV in the current plan can cover this. However my guess is that some of the privatization money will ultimately find its way into the SPV for this purpose, as a form of partial coverage for the coupon payments. Also the ECB will bring huge pressure on the EU to keep providing taxpayer money for funding the coupon payments to avoid the “nuclear meltdown” scenario, e.g. as described by Ackermann this week. Apparently its all for our own good, you see. Who could possibly be in favour of a nuclear meltdown?

For anyone still interested in the details of the French plan a very detailed analysis by CEPS can befound here.

It takes the same approach as I outlined above of viewing the deal as a combination of a 30 yr annuity and a 30 yr zero-coupon bond.

The overall conclusion are not surprising

We have shown that implementation of the French initiative under the proposed parameters
would significantly worsen the solvency of the Hellenic Republic. It would result in a marked increase in gross government debt and in net debt service over the coming years. From Greece’s perspective, it is difficult not to regard the initiative in its current form as an insult.

The French proposal mimics the form of the Brady plan, without accepting its economic
substance, namely to provide debt relief to countries with a clear sovereign debt overhang.

It suggests that the terms be modified to

Reducing the cash component of the planned bond exchange and lowering the
coupon rate of the new long-term Greek government bonds with principal guarantee to a level of 1%, plus a GDP-linked surcharge would turn this into a sensible proposal.

1% – Good luck with that!

One interesting point is that it concludes that there is a haircut (of about 16%) from the point of view of the Banks, from par value. There would be a profit for anyone marking to market. If the rating agencies do their sums the same way, then they will not be able to avoid a downgrade, which if “ECB rules” are being played, means the plan won’t go forward as is i.e. it would have to be made even more favourable to the banks, and an even worse deal for Greece; or else the ECB will just have to change their rules again.

Since the ECB appear to put so much stock in what a few US-based ratings agencies say, I would suggest that the rating agencies expand coverage to include that of rating Central Banks on how they fare on a scale with “grounded-in-reality” at one end and “delusional” at the other. Perhaps when the ECB see their own rating it will be just the short sharp shock that is needed….

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