Why they’ll extend private Greek debt maturities — in two charts:
Both those tables were put together by JPMorgan analyst David Mackie in a note published a week or two ago. They’re well worth resurrecting. The first chart shows official exposures to Greece to 2013, assuming that its inability to finance on the market in these years is completely plugged by extra bailout loans. (Speculation in markets about the size of these hypothetical loans was febrile, and desperate, on Tuesday: €27bn, €50bn, €60bn, etc.)
The second chart is where it gets interesting, as the assumption is that private debt maturing in 2012 and 2013 is extended, so as to completely extirpate refinancing need. Official exposure goes down quite a lot. About €70bn vanishes in fact, relative to extra lending.
That’s very handy for core eurozone taxpayers. We know that the (ex-IMF) official debt is pari passu with private holders of Greece, thus it’s equitably susceptible to the 50 per cent haircut on bond principal which is by this point generally pencilled in for 2013. It’s about losing, forever, €70bn of the €141bn exposure.
As Mackie put it, the loss would be a one-off fiscal transfer. You’ll never achieve a zero fiscal transfer to Greece by this point, we’d emphasise – even if the eurozone doesn’t lend Greece a single red cent from this point onward, about €38bn is gone already from a haircut of 50 per cent.
So with that in mind…
…isn’t the more pragmatic approach simply to decide what kind of fiscal transfer works best, if you have to make a transfer anyway?
We’d particularly press the question in the context of a ‘voluntary’ maturity extension for private creditors. There’s a real interest in doing this in order to prevent credit default swaps on Greece being triggered in a Restructuring Credit Event. It’s a trifle bit making a mountain out of a molehill, as there’s really not that much net notional of exposure ($5.5bn or so, according to the DTCC) and it wouldn’t necessarily all trigger: restructuring events are optional for CDS buyers. They may even wish (for trading strategies) to wait for a Failure to Pay event or for future Greek debt exchanges where recovery values differ.
(Here’s an enlightening chart via Lisa Pollack of Markit of falling Greece CDS exposures, by the way:)
And of course, a ‘voluntary’ swap risks lack of uptake (ergo, greater fiscal transfer via compensating bailout loans), particularly because volunteers face a second haircut compared to those who stay out. It might therefore make more sense to add elements of coercion, thus risking CDS triggers.
But! The concern seems to be directed at Greece CDS sellers being unable to pay out owing to their own capital inadequacy. It doesn’t take an Inspector Cloiseau to work out this means Greek banks, whose default prospects are pretty well correlated with the Greek sovereign’s.
So that’s why we think, if you must do a fiscal transfer, you may as well get bang for your buck and target transfers at restoring banks’ capital, if there are double risks right now from CDS triggering and future haircuts. And you may as well do it as part of this maturity extension in 2011.
It’s really another argument for Brady-ising Greek restructuring, using credit enhancements and collateral on the bonds that replace older maturities. Now, the new “Roubini plan” that’s circulating for Greece is wary of Brady-type enhancements. Roubini argues that quality collateral (such as long-term bunds) would be too costly for Greece to source.
Well, the point is… the official sector can lend to Greece for fiscal backstop reasons, or it can lend collateral at low rates, achieving better objectives (namely, bank capitalisation, including beyond Greece’s financial sector). There are all sorts of enhancement in prospect too if you look through past restructuring events — for example, Argentine-style GDP warrants — that are neutral with respect to fiscal transfers.
The drawback — a huge one — is the vast complexity that collateral options add to a Greek restructuring. Nevertheless, Europe is walking into a one-off fiscal transfer to Greece one way or the other. A maturity swap is already the beginning of modifying or reducing that transfer. If you have to swap *and* keep some transfer, you may as well put the opportunity to use.
Related links:
To avoid Greek restructuring losses – an accounting loophole for banks – FT Alphaville
What are CDS really worth? – Chris Whittall / IFR (must-read)
Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998–2005 (PDF) – IMF (2005)
How to save the eurozone, by JPMorgan – FT Alphaville