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In Greece, creditors and the government continued their work on a debt deal that would give a haircut to debt holders and set a new interest rate going forward, reducing Greece’s debt level. After hedge funds appeared to be playing a game of chicken by holding out on a deal, cooler heads may have prevailed.
Greece was closing in on an initial deal with private bond holders on Friday that would prevent it from tumbling into a chaotic default but lose investors up to 70 percent of the loans they have given to Athens.
The agreement, to be followed up by technical talks over the weekend, could come later in the day, sources close to the negotiations said.
Private bondholders would most likely incur a real loss of 65 to 70 percent, with the new bonds having a 30-year maturity and offering a progressive coupon, or interest rate, averaging out at 4 percent, a banking official close to the talks told Reuters.
That’s even more than the 50% haircut proposed by the EU. European officials have tied a deal on the debt to the release of another tranche of bailout funds for Greece.
Even in the event that this deal happens, Greece’s debt load would remain 120% of GDP, down from a less manageable 160%. And the real problem for the country is not necessarily the debt, but the crushing burden of austerity, which has impoverished practically the whole country (the same thing it’s doing to Ireland, incidentally). Without economic growth, this reduction in the debt load will simply be followed by another increase. Austerity has not only led to national poverty in Greece, but also more borrowing as the tax base collapses.
The hedge funds may still hold out against this deal, at which point the Greek government is prepared to force the haircut through by changing Greek law. That’s when the hedgies may sue in human rights court, of all places. But we’re not quite there yet. If Greece can get a 75% participation rate from the bond holders, they could force the terms of the agreement on all bondholders through collective action rules written into the bonds.
The other issue is whether the deal would trigger credit default swaps. Because of the interest rate dipping below 4% (it would increase to over 4% over time), many observers believe that it will not be voluntary, meaning that CDS will trigger. The rating agency Fitch was prepared to say that CDS should get triggered even if the bond holders believed the deal to be voluntary. So I’d prepare for some chaos after that event, and possible contagion into neighboring Eurozone countries.
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Ah yes, the poor little hedge funds will have their “human” rights violated by not being allowed to plunder Grandma’s food stamps.
Thanks:))))))))))))))) so true but they will keep working on trying to kill all of us Main Streeters no matter what nation we live in.
Look folks, this is what happens when Govt promises more than it can deliver. In Greece’s case it so weakened the private sector, the entire country became dependent. Austerity was going to come one way or another. You can take the band-aid off slow or fast. The same thing will happen here.
Iceland did it fast and they are now on the way to recovery.
Shooter – The other factor always is who pays for what. Does the public take a 80% cut in services so the lenders can only take a 20% cut on loan repayments, or is it reversed? That is what this battle is over: the bill has come due, who pays what? Everyone feasted more than they should have, but who ordered what? Iceland stuck it to their loan lenders and forced them into receivership. Basically, they let the banks fail and the bond/stock holders lost their entire value, the country had a recession due to credit contraction, and now they are ont he mend. Some austerity, but more in line with the “classic” pullback deemed natural after a credit boom goes bust.
In Greece, all the banks should go through the same process and have their bond/stock holders wiped out. But since these elite investors own not only the banks but the governments, they don’t want to take their fair medicine. The entire process of finding a “deal” is a charade IMHO, the proper “deal” is you made bad loans, the borrower can’t pay, now you lose all your money due to poor investment. That’s the free marker in action, anything else is trying to keep rich fools from parting with their money – not a good idea since they are still fools.
Greece will eventually default, or Italy, or Portugal, or Spain, or … and this house of cards will come tumbling down. Not a moment too soon either IMHO, this should have all happened in 2008 when we first discovered our global banking system was insolvent.
Agreed.
We have a global elite so in tune with the 24 hour news cycle that they have no clue how to actually govern.
The reality is that not only will Greece ultimately default on ALL its debt, their economy will still CRATER.
Yet EVERY headline is how a “deal” is coming that will divert this inevitability so that what is left of the markets won’t react badly over the next 24 hours.
“Confidence” won’t provide a middle class lifestyle to 7 billion people; either we all will eat shit sandwiches together, or their will be winners and losers who must come to blows, making the situation even worse.
The 0.1% won’t eat shit sandwiches with the rest of us, which is what these “deals” area all about.
Aux armes.
That’s right, but since the banks own all the governments, contract and market principles become meaningless and taking it out on the peasants is the only reasonable thing to do, from the perspective of the PTB. Of course, from the perspective of the peasants, killing all those who collaborated in creating this disgraceful situation, and confiscating all their family asssets, is the only reasonable thing to do. But, whatever, let’s just keep jawboning about the elections. Oh, and where did Newt put his dick?
Shooter,
You know fuck-all about economics and really shouldn’t embarrass yourself.k I said a couple of days ago that I would go head to head with you anytime on economics. I am writing tonight from Moscow,where I was invited by the Russians to be. on the programme with Jeff Sachs. So STFU
iceland did not do austerity. It told the banks to accept the losses!
“The hedge funds may still hold out against this deal, at which point the Greek government is prepared to force the haircut through by changing Greek law. That’s when the hedgies may sue in human rights court, of all places. But we’re not quite there yet. If Greece can get a 75% participation rate from the bond holders, they could force the terms of the agreement on all bondholders through collective action rules written into the bonds.”
Thanks for the well written summary – I tried to write this up but was not as clear.
But in any case I am amused with the “75%” loss the hedge funds are claiming – they bought the bonds at 38 cents on the dollar and get back a 50 cent on the dollar 4% coupon that goes higher with GDP growth bond. I did these present values comparisons for a living for 45 years – and whoever is feeding the press a 75% loss is pulling the media’s leg! The risk adjusted rate and therefore present value was always much less than what the hedge funds are getting. They lose nothing. We are only discussing the size of their profit. It is exactly the same situation as the mortgage back securities that the hedge funds bought a year ago and now want 100 cents cash on because we all need to punish the shareholders of the banks, so why not do so by making the folks that caused the disaster – the hedge funds (the hedge funds and the investment banks caused the disaster) – richer at the expense of the shareholders in the banks.
I love the idea that the hedge funds, who do not give a damn about humans, are going to go to court to claim their human rights are being violated because they did not get the extra profit they demand.
That move just so fits the current political situation for the 99%. No people that ordered the fraud are in trouble – because they own the government via both parties – so just screw the shareholders.
Shooter is doing his best to channel Milton “Disaster Capitalism” Friedman.
Austerity is for assholes.
As I reported in my Diary today:
The ECB, the EC, and the IMF say that new projections of the effect of austerity on Greece is a larger contraction of the economy in 2012 and 2013, making the 4% coupon too high for Greek to afford. So Yesterday evening they called for a lower interest rate averaging 3.5 per cent on new bonds – this after it was reported that private bondholders had already agreed on a 4 per cent coupon. Greece says it must have a final agreement by Monday.