PSI: Greece Post author By Philip Lane Post date January 8, 2012 The FT reports on the likelihood of a bigger reduction in the value of the debt held by private-sector investors in this article, while Cypriot central bank governor Orphanides expands on the downside of PSI in this op-ed. Categories In Uncategorized 14 Comments on PSI: Greece ← The Debt Crisis: Causes, Consequences, Controls → Germany Resists Europe’s Pleas to Spend More 14 replies on “PSI: Greece” Also worth reading: Gulati and Zettlemeyer (both of whom know a thing or two about sovereign defaults) on “making a voluntary Greek exchange work”. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1979474 Its the math that’s speaks. You can, or you cannot pay. Its been the latter for about a decade (20 yrs in Japan!). You want to be able to pay? Then ramp up your production and sell to others. Bank your surplus. Its a tad uncomfortable if lots of folk try this out simultaneously, and at the same time, so to speak. Lots of sellers, few demanders. If you cannot ramp up and sell to a willing buyer (and this is the predicament we are in) your ‘busted’, and your ‘investors’ will have to accept pennies on the dollar. You can stiff your citizens for a while. But eventually they rebel. They stop being ‘conspicuous consumers’. Margins collapse, and its ‘game over’. Brian. I have been saying for some time that Greece is a dead duck (or parrot or zombie or whatever you want to call it) and has been dragging its feet in the PSI negotiations – not that the private sector is any keener to come to a deal and colleagues tell me there’s more than a feeling that if they drag it on long enough ‘something will come up’ (e.g. the Troika paying bondholders off in a better deal and putting something on the even longer finger for Greek taxpayers to pick up). The 50% deal doesn’t appear to actually be a solution for either side. Yer man from Cyprus has always said PSI should be banned. He’s still singing the same tune. In fact, most of this is fairly old news and was being discussed before Christmas. Italy has been making some interesting moves – banning cash transactions (as in making them actually illegal) over €1,000 and making withdrawals over €10,000 in cash from banks far from straightforward. We’re not going to get a couple of ‘bank holidays’ announced in Greece and Italy soon are we? @ PR Guy You left out Portugal. The owner of Jeronoimo Martins (€7 bn revenues, 50k employees), the Portugeuse equivalent of Dunnes Stores, had moved its holding company to the Netherlands this week. http://www.reuters.com/article/2012/01/07/us-portugal-business-leader-says-uncerta-idUSTRE8060C620120107 “I also don’t know if Portugal will stay in the euro. And if it leaves, it will be to the escudo,” Soares dos Santos told Expresso, referring to the escudo currency used by Portugal before it adopted the euro. “I have a right to defend my property.” The probability of a bank holiday in Greece approaches 1 as we head to Christmas ’12, followed swiftly by Portugal. The only question I’m struggling with is when the bell tolls for Ireland – I’m thinking towards the end of 2013? Whatever happens, for good or ill, in regard to a Greek managed default (or PSI if one prefers) had better happen by 20th March next. This is the date on which its next bond redemption falls, totalling €14.4bn. Were this to be repaid at par, the available pot would be significantly shrunk, and the haircut would have to be greater still on the remaining bonds outstanding. A failure to reach some agreement by that date will possibly trigger a unilateral default – I was going to say “disorderly”, but it seems superfluous. @inscrutable Yes, I was reading about that earlier. He moved his family too. Perhaps he’s seen the same writing on the wall that Richard Tol caught a glimpse of. I didn’t get to finish my earlier post – kids and accounts… What I’m most interested in are the consequences of ‘voluntary’ becoming involuntary. I had assummed Tim Geithner was over here to prevent exactly that as he probably has a far clearer idea of the potential fallout than anyone on this blog (as in he is bound to know things we just don’t know i.e. what US bankers have told him about where be ye dragons if there’s a credit event triggered) and there were clearly alarm bells ringing just the fact he had been sent to Europe (twice). Someone over there is swimming without trunks on. The problem with voluntary arrangements (any negotiations for that matter) in finance are that such niceties as ‘win/win’ are just talk or for marriage guidance counsellors. Everyone is in it to screw the other side and come out ‘on top’ as much as possible – it’s the nature of the beast and I see the beast every day – and when the PS side of PSI contains so many different parties it complicates matters further. @aiman I think is right that March is the critical point. It will no doubt go down to the wire based on past performances in the EZ… Greece refusing to budge and the PS’s ‘playing hardball’ thinking that someone (ECB, IMF, Germany, etc.) will ride in with a rescue deal that will benefit them at the last minute. @PR Guy You are correct in suggesting that Greece has been a Turkey (pardon the obvious issues that phrase that encapsulates) for some time – but on virtually all levels Irelands debt position is significantly worse. Yes its Govt debt hole may not be at Greek levels but we more than compensate in the private debt space. Given this state of affairs should it not be Ireland doing the negotiating with its bond holders / creditors re a PSI? Perhaps Enda and the team have a cunning plan kept secret in Leinster House to wish away the private debt mountain without some lender getting severely burnt, but I sincerely doubt it. So lets be crystal on this issue. Ireland in every respect needs a PSI every day of the week before Greece. Can we please stop prentending otherwise and bite the PSI bullet. @ PR Guy It’s always good to read your comments – an observer at the coal face so to speak! I’m only now getting round to reading Too Big to Fail, and to assume these guys have more clue than we is perhaps being generous. But yeah, who currently holds the Greek CDS bag is an interesting question. Kyle Bass started buying Greek CDS in mid-08 for an incredible 11 bps, and stands to make about a $1 bn when they trigger. http://www.businessinsider.com/new-michael-lewis-book-kyle-bass-has-big-role-as-a-europe-superbear-2011-10 He got them from Goldman and they’re posting collateral. Assuming the other purchasers of Greek CDS insisted on collateral posting, the fallout might not be that big. It’s more the precedent it sets that scares everyone, methinks. We will then have crossed the modern western democracy default rubicon, entering a brave new world where nothing is risk free. @ Karl Whelan, Mr Bond if he’s around. Just having a look at the paper posted by Karl. Here’s a quick question. When buyers buy a EZ government bond – Irish, Greek, German or whatever, what does it say on the fine print about the chances of losing your money? A lot of this argument seems to me to be about the ‘assumed risk free status’ of sovereign debt, so it would be nice to see what was actually written down when institutions/people bought the bonds. Is there a link to something like this? @ Gavin “fine print”? They don’t do full on prospectus’, just ‘offering circulars’, and thats just a few pages with some technical info on settlement etc. Think the most the NTMA have is a disclaimer saying you should seek independent advice before buying or selling government bonds. @Gavin Kostick – nothing. Why would it? @ Mr Bond & aiman Thanks for that. It was just that so many financial offers that go to the public have warnings like ‘your investment may go down as well as up, that I wondered if something like, ‘in case of national emergency, eg Art of God, etc…’ was included. I think I heard correctly a few minutes ago – Merkel threatened Greece that if they don’t get this PSI deal sorted asap they will lost their next tranche of aid… though she is still saying that she ‘hopes’ Greece will stay in the EZ. So there you have it – a German leader saying that a disorderly default is a possibility and the Troika will actually allow it to happen by holding that tranche back? I suspect the threat was aimed more at the other side of the negotiating table than the Greeks themselves: accept the deal or end up in an even worse position/lose more. We’re going to have some very unhappy bondholders … after all, the Greek PSI deal is now being touted as the primary source of contagion. Ordinarily, the PM or FM of a country on the end of a threat like that would be hitting the airwaves no longer than 3-4 hours after such a statement related to their country. I wonder if we will get any comments about Merkel’s statement from the Greeks today? Sony Kapoor on twitter: “I am getting concerned that 2 many people r getting confused between face value & NPV haircuts on #Greek debt” “So people, a 50% face value haircut on #Greek debt may even b a 60-75% NPV haircut @ 12% discount rates” If you are the defaulter, are you more concerned about the face value than the NPV as the NPV is irrelevant unless you are buying the bonds back? Comments are closed.