(Reuters) – Standard & Poor’s on Wednesday cut Greece’s sovereign credit rating further into junk territory, lowering it to CC from CCC, saying the European Union’s proposed debt restructuring puts the country into a “selective default.”
How junkier can you go?
I have to admit the language is confusing me. There will be a bond exchange but one side of the transaction is not a bond. The exchange will be done at par but one side of the transaction will lose 21% of NPV. I can’t find the interest rate of the zero-coupon bond.
Is the bond issued by EFSF or by?
If Greece were to default, would the holder of the instrument also have recourse to the EFSF or only to the 30 year zero-coupon bond and Greece?
Anyone out there who likes to play around in excel and able to show some examples of different outcomes (time until a possible default) for option 1?
While the extra bit detail of is welcome, I believe this is still “Information on IIF offer” as the title of the EU document says. The details are still under negotiation with the authorities (and some other aspects of the IIF proposition are still not clear). These negotiations will continue for a while, maybe through August. So the numbers could change, and an earlier Reuters indicated quite some latitude, citing EU officials.
.
Separately S&P published a report this evening suggesting the recent EU initiative is beneficial for the debt sustainability of both Ireland and Portugal. But “we do not anticipate that these measures will have an immediate effect on our ratings or outlook on Portugal and Ireland, given the continuous challenges faced by both countries in their efforts to narrow their sizeable fiscal deficits, and to restore sustainable growth performance” (S&P). {NSN LP05E73PWT1E }
Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago). Along the lines of Philip’s proposition (see earlier post today), there is a fresh window of opportunity to make sure that it stays that way, even if no picnic.
@Ciaran o’Hagan
“Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago”
I wouldn’t be getting too excited..yet. 2yr bund spread closed at 13.36% and 10yr at 8.52%. Admittedly, 2yr came in about 150 bp. Short covering or a punt on ESM and sustainability?
A key question is whether an equivalent PSI arrangement is something that Ireland should seek, or consider if offered, (notwithstanding all the solemn inflexible and honourable pledges) in 2013. The answer would appear to be a resounding no. The PSI financing is at a considerably higher cost to Greece than the EFSF funding.
(1) For Bailout #1 Greece had
– funding from IMF at normal IMF rates + more expensive EU funding.
(2) This is now replaced with
– cheap EU funding + funding from IMF at normal IMF rates + more expensive Bank/IIF funding.
(3) Greece would have been better off with
– cheap EU funding + funding from IMF at normal IMF rates
(4) And even better off with
cheap EU funding + funding from IMF at normal IMF + significant (involuntary) debt reduction due to haircuts
EU Commission officials have indicated that the bailout is more expensive and more risky due to the “voluntary” PSI (i.e. (3) would have been better than (2)).
The debt reduction due to PSI is minimal at about 7% of debt stock. The exchange offer is more like a loan than a bond, since Greece will be making a series of annual payments (coupons on the bonds, and principal and interest on the €42bn loan to buy the AAA collateral) without any bullet payment due by Greece at the end. I figure the PSI is equivalent to a 5.5% – 6% loan, though that was a very rough calculation, i.e. equivalent to “old-style EFSF” funding rates.
There is now some pushback from emerging countries about putting more IMF funds into the whole exercise.
Paulo Nogueira Batista, who represents Brazil and eight other countries on the IMF’s executive board, said the Greek government’s austerity plan was too tough and the restructuring of Greek debt held by European banks was too small. “Greece is not having an easy time,” he told the FT. “The mostly European private creditors of Greece have had an easy time.”
At this point the only resolution for Greece seems to be that the EFSF will end up with nearly all the debt, and will then write some of this off, though whether the Germans go along with that remains to be seen. It is either fiscal union or bust.
@Ciaran O’Hagan
Ireland benefits from the interest rate reduction, of course, but this needs to be put in perspective. The interest payments due in the next 5 years are in €bn
5.9 -> 7.6 -> 10.2 -> 11.0 -> 11.3
So a saving of approx €1bn a year is about a 10% reduction in the annual interest bill in 2013-2015. Useful, but not a game changer by any means.
I think the markets already assume that Ireland is the best boy in the bailout class, and will diligently try and do all the homework assignments the teacher gives out. All the homework has been completed to date. It is the teachers and the crazed headmasters that are causing some of the nervousness.
@Bryan G
A recent reuters blog suggests something very similar to your argument above i.e. the PSI arrangements will actually increase the Greek debt burden – not surprisingly the ECB gave it the all clear last week. !
The BRIC representatives on the IMF quoted by Brian G above are right.
The total debt reduction will be €26.1bn. This is less than the €28bn contribution envisaged from Greece’s own privatisation programme. Of course, a haircut of 21% is actually a bailout of creditors compared to market prices and the risk of default.
When the BRICs say the terms for Greek citizens are too harsh, this is not (mainly) a moral judgement. Likewise with the verdict that for creditors they are too soft. They are unworkable and will not restore solvency.
This is a lesson that should be heeded in relation to this economy. But instead, the debate is now about €3.6bn or €4bn of further cuts. Presumably because the €20.6bn in previous fiscal tightening worked out so well.
@ Michael Burke,
“This is a lesson that should be heeded in relation to this economy. But instead, the debate is now about €3.6bn or €4bn of further cuts. Presumably because the €20.6bn in previous fiscal tightening worked out so well.”
Can you hear the fingers drumming the keyboards. The cuts deniers. The austerity has yet to happen brigade. Due any moment now…. Shhh!
@ All
An interesting report from Reuters on the nature and the timescale of the changes to be made to the EFSF.
The reporting is rather sloppy as it implies that some form of legislative procedure involving EU institutions is involved. This is, of course, not the case as can be readily checked on the ESF website, which includes the draft of the amendments to the basic framework agreement agreed in March and which have not yet completed their passage through national ratification procedures.
That the passage of the new changes may not be easy in Germany can be gauged from anothe Reuters report.
All cans are now being into the EFSF.
The PSI haircut was so low it is risible.
The PS won all battles so far. They had the ECB as their armoury, threatening destruction on their behalf. The threat alone was sufficient to scare off the third estate.
Is the EFSF going to morph into a type of financial CAP. It is hard to think that European citizens will wear that while the first and second estates continue to enrich themselves.
@Ciarán OH
“Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago). Along the lines of Philip’s proposition (see earlier post today), there is a fresh window of opportunity to make sure that it stays that way, even if no picnic.”
Yes I think there is – at least in the sense that the country could regain the previous (if false) reputation for doing “all the right things” in CNBC-speak. If the economy tanks then, then it is clearly not the country’s fault, and international rescue could hardly be withheld.
Thing is, it doesn’t seem likely to be done. My favorite indicator is the unanimity of the determination to pretend that the Croke Park agreement still binds the government to no further pay cuts etc. Even Colm McCarthy is a fairly recent convert to this line, twelve months ago he was willing to point out the government’s “out”.
The reality is that that the Agreement does not bind the government at all due to paragraph 1.28 – the “this Agreement is subject to no currently unforeseen budgetary deterioration” one.
It doesn’t so much matter that the choice is being made – you can argue that maintaining a highly paid public sector is a good idea in a recession (though my own view is that is no the case if it is at the expense of disproportionate austerity everywhere else).
What I find really telling, is that they have chosen to do this in a cowardly and devious way. They are using Croke Park as cover – “Croke Park means we have to” rather than setting out an argument to the public – and the markets, as to why it is a good idea. This speaks volumes.
The fact is they reckon they could not win that argument, but they want to maintain the status quo. Most effective tactic – SSSSHHH!
Recently the implementation body reported on implementation. It had zero to say about the (non) implementation of 1.28. Viz:
“Why has the Implementation Body got nothing to say about progress on implementation of paragraph 1.28 of the agreement, which states:
“the implementation of this Agreement is subject to no currently unforeseen budgetary deterioration”
The agreement dates from March 2010.
There is a section of “Status of the Agreement” which makes no mention of the budgetary deterioration since March 2010 that led to the IMF EU bailout and recent speculation from a government ministers even, about the possibility Ireland will require a second bailout (not to mention the bond market which has been rather more unambiguous than that) Nor does the Implementation Body even see fit to mention the existence of paragraph 1.28 never mind comment on the failure to implement it.
Have they not read the agreement, or is it a conspiracy of silence?”
@Ciaran,
thanks for the information.
I take it that the first offer from last week was not seen as good enough for the guarantor countries in the EU so changes had to be made. Am a bit surprised that information regarding the offers are made public. I suppose some might believe it will be easier for the EC to get an offer accepted by the parliaments in the guarantor countries if it is clear that a marked improvement from the original offer is achieved. Personally I’ve never been much of a fan of such tactics, the final agreement has to be good on its own; as an example I believe a 50% reduction from peak price of a property in Ireland might still be a bad deal and more information is needed to evaluate it properly.
If an expected average discount of 38% on the debt buyback is to be achieved then the bondexchange should give similar amount of expected losses. Will be interesting to see how the offers will change to reflect this.
Those that play with fire eventually get their fingers badly burnt (on both sides of the Atlantic).
@ All
Having shot himself monumentally in the foot by implying in a letter to the Bundestag that there was no automaticity about EFSF involvement, Schaeuble is now in full retreat. Trying to have one’s cake and eat it is not a viable proposition (even if the constraints of domestic politics, as in the US, are seen as the entire universe).
15 replies on “PSI: Greece”
reaction not so good…..
(Reuters) – Standard & Poor’s on Wednesday cut Greece’s sovereign credit rating further into junk territory, lowering it to CC from CCC, saying the European Union’s proposed debt restructuring puts the country into a “selective default.”
How junkier can you go?
I have to admit the language is confusing me. There will be a bond exchange but one side of the transaction is not a bond. The exchange will be done at par but one side of the transaction will lose 21% of NPV. I can’t find the interest rate of the zero-coupon bond.
Is the bond issued by EFSF or by?
If Greece were to default, would the holder of the instrument also have recourse to the EFSF or only to the 30 year zero-coupon bond and Greece?
Anyone out there who likes to play around in excel and able to show some examples of different outcomes (time until a possible default) for option 1?
While the extra bit detail of is welcome, I believe this is still “Information on IIF offer” as the title of the EU document says. The details are still under negotiation with the authorities (and some other aspects of the IIF proposition are still not clear). These negotiations will continue for a while, maybe through August. So the numbers could change, and an earlier Reuters indicated quite some latitude, citing EU officials.
.
Separately S&P published a report this evening suggesting the recent EU initiative is beneficial for the debt sustainability of both Ireland and Portugal. But “we do not anticipate that these measures will have an immediate effect on our ratings or outlook on Portugal and Ireland, given the continuous challenges faced by both countries in their efforts to narrow their sizeable fiscal deficits, and to restore sustainable growth performance” (S&P). {NSN LP05E73PWT1E }
Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago). Along the lines of Philip’s proposition (see earlier post today), there is a fresh window of opportunity to make sure that it stays that way, even if no picnic.
@Ciaran o’Hagan
“Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago”
I wouldn’t be getting too excited..yet. 2yr bund spread closed at 13.36% and 10yr at 8.52%. Admittedly, 2yr came in about 150 bp. Short covering or a punt on ESM and sustainability?
There is also a BNP Paribas report which goes into more detail.
A key question is whether an equivalent PSI arrangement is something that Ireland should seek, or consider if offered, (notwithstanding all the solemn inflexible and honourable pledges) in 2013. The answer would appear to be a resounding no. The PSI financing is at a considerably higher cost to Greece than the EFSF funding.
(1) For Bailout #1 Greece had
– funding from IMF at normal IMF rates + more expensive EU funding.
(2) This is now replaced with
– cheap EU funding + funding from IMF at normal IMF rates + more expensive Bank/IIF funding.
(3) Greece would have been better off with
– cheap EU funding + funding from IMF at normal IMF rates
(4) And even better off with
cheap EU funding + funding from IMF at normal IMF + significant (involuntary) debt reduction due to haircuts
EU Commission officials have indicated that the bailout is more expensive and more risky due to the “voluntary” PSI (i.e. (3) would have been better than (2)).
The debt reduction due to PSI is minimal at about 7% of debt stock. The exchange offer is more like a loan than a bond, since Greece will be making a series of annual payments (coupons on the bonds, and principal and interest on the €42bn loan to buy the AAA collateral) without any bullet payment due by Greece at the end. I figure the PSI is equivalent to a 5.5% – 6% loan, though that was a very rough calculation, i.e. equivalent to “old-style EFSF” funding rates.
There is now some pushback from emerging countries about putting more IMF funds into the whole exercise.
At this point the only resolution for Greece seems to be that the EFSF will end up with nearly all the debt, and will then write some of this off, though whether the Germans go along with that remains to be seen. It is either fiscal union or bust.
@Ciaran O’Hagan
Ireland benefits from the interest rate reduction, of course, but this needs to be put in perspective. The interest payments due in the next 5 years are in €bn
5.9 -> 7.6 -> 10.2 -> 11.0 -> 11.3
So a saving of approx €1bn a year is about a 10% reduction in the annual interest bill in 2013-2015. Useful, but not a game changer by any means.
I think the markets already assume that Ireland is the best boy in the bailout class, and will diligently try and do all the homework assignments the teacher gives out. All the homework has been completed to date. It is the teachers and the crazed headmasters that are causing some of the nervousness.
@Bryan G
A recent reuters blog suggests something very similar to your argument above i.e. the PSI arrangements will actually increase the Greek debt burden – not surprisingly the ECB gave it the all clear last week. !
http://blogs.reuters.com/columns/2011/07/25/greek-rescue-bizarrely-increases-its-debts/
The BRIC representatives on the IMF quoted by Brian G above are right.
The total debt reduction will be €26.1bn. This is less than the €28bn contribution envisaged from Greece’s own privatisation programme. Of course, a haircut of 21% is actually a bailout of creditors compared to market prices and the risk of default.
When the BRICs say the terms for Greek citizens are too harsh, this is not (mainly) a moral judgement. Likewise with the verdict that for creditors they are too soft. They are unworkable and will not restore solvency.
This is a lesson that should be heeded in relation to this economy. But instead, the debate is now about €3.6bn or €4bn of further cuts. Presumably because the €20.6bn in previous fiscal tightening worked out so well.
@ Michael Burke,
“This is a lesson that should be heeded in relation to this economy. But instead, the debate is now about €3.6bn or €4bn of further cuts. Presumably because the €20.6bn in previous fiscal tightening worked out so well.”
Can you hear the fingers drumming the keyboards. The cuts deniers. The austerity has yet to happen brigade. Due any moment now…. Shhh!
@ All
An interesting report from Reuters on the nature and the timescale of the changes to be made to the EFSF.
http://www.reuters.com/article/2011/07/27/eurozone-greece-idUSB5E7IJ01U20110727
The reporting is rather sloppy as it implies that some form of legislative procedure involving EU institutions is involved. This is, of course, not the case as can be readily checked on the ESF website, which includes the draft of the amendments to the basic framework agreement agreed in March and which have not yet completed their passage through national ratification procedures.
That the passage of the new changes may not be easy in Germany can be gauged from anothe Reuters report.
http://www.reuters.com/article/2011/07/28/eurozone-regling-idUSLDE76R0AP20110728
What will the ECB do in the meantime?
All cans are now being into the EFSF.
The PSI haircut was so low it is risible.
The PS won all battles so far. They had the ECB as their armoury, threatening destruction on their behalf. The threat alone was sufficient to scare off the third estate.
Is the EFSF going to morph into a type of financial CAP. It is hard to think that European citizens will wear that while the first and second estates continue to enrich themselves.
@Ciarán OH
“Ireland’s star for now is in the ascendency, just like it was in July 2010 (5y spread to Bund fell to under 140bp this time a year ago). Along the lines of Philip’s proposition (see earlier post today), there is a fresh window of opportunity to make sure that it stays that way, even if no picnic.”
Yes I think there is – at least in the sense that the country could regain the previous (if false) reputation for doing “all the right things” in CNBC-speak. If the economy tanks then, then it is clearly not the country’s fault, and international rescue could hardly be withheld.
Thing is, it doesn’t seem likely to be done. My favorite indicator is the unanimity of the determination to pretend that the Croke Park agreement still binds the government to no further pay cuts etc. Even Colm McCarthy is a fairly recent convert to this line, twelve months ago he was willing to point out the government’s “out”.
The reality is that that the Agreement does not bind the government at all due to paragraph 1.28 – the “this Agreement is subject to no currently unforeseen budgetary deterioration” one.
It doesn’t so much matter that the choice is being made – you can argue that maintaining a highly paid public sector is a good idea in a recession (though my own view is that is no the case if it is at the expense of disproportionate austerity everywhere else).
What I find really telling, is that they have chosen to do this in a cowardly and devious way. They are using Croke Park as cover – “Croke Park means we have to” rather than setting out an argument to the public – and the markets, as to why it is a good idea. This speaks volumes.
The fact is they reckon they could not win that argument, but they want to maintain the status quo. Most effective tactic – SSSSHHH!
Recently the implementation body reported on implementation. It had zero to say about the (non) implementation of 1.28. Viz:
“Why has the Implementation Body got nothing to say about progress on implementation of paragraph 1.28 of the agreement, which states:
“the implementation of this Agreement is subject to no currently unforeseen budgetary deterioration”
The agreement dates from March 2010.
There is a section of “Status of the Agreement” which makes no mention of the budgetary deterioration since March 2010 that led to the IMF EU bailout and recent speculation from a government ministers even, about the possibility Ireland will require a second bailout (not to mention the bond market which has been rather more unambiguous than that) Nor does the Implementation Body even see fit to mention the existence of paragraph 1.28 never mind comment on the failure to implement it.
Have they not read the agreement, or is it a conspiracy of silence?”
@Ciaran,
thanks for the information.
I take it that the first offer from last week was not seen as good enough for the guarantor countries in the EU so changes had to be made. Am a bit surprised that information regarding the offers are made public. I suppose some might believe it will be easier for the EC to get an offer accepted by the parliaments in the guarantor countries if it is clear that a marked improvement from the original offer is achieved. Personally I’ve never been much of a fan of such tactics, the final agreement has to be good on its own; as an example I believe a 50% reduction from peak price of a property in Ireland might still be a bad deal and more information is needed to evaluate it properly.
If an expected average discount of 38% on the debt buyback is to be achieved then the bondexchange should give similar amount of expected losses. Will be interesting to see how the offers will change to reflect this.
@ All
FYI
http://www.ft.com/intl/cms/s/0/e223c11c-b8f4-11e0-bd87-00144feabdc0.html#axzz1TQdswuPU
Those that play with fire eventually get their fingers badly burnt (on both sides of the Atlantic).
@ All
Having shot himself monumentally in the foot by implying in a letter to the Bundestag that there was no automaticity about EFSF involvement, Schaeuble is now in full retreat. Trying to have one’s cake and eat it is not a viable proposition (even if the constraints of domestic politics, as in the US, are seen as the entire universe).
http://www.ft.com/intl/cms/s/0/7eed8756-b947-11e0-b6bb-00144feabdc0.html#axzz1TQdswuPU