We don’t really know where to start with this (it’s doing the rounds):
(Click images for full presentation)
It’s a Greek rescue proposal by Roland Berger, the consultant firm, to the German government, according to La Tribune. It begins with Greece selling €125bn of assets ear-marked for privatisation — a trifling 54 per cent of GDP — to a eurozone-run SPV, all in one go. Greece then uses the proceeds to buy back debt.
Now, look, FT Alphaville are naturally sceptical of ‘in one fell swoop!’ solutions, especially at the eleventh hour. ‘Gamble for resurrection’ springs to mind as a phrase. It’s also clear that the German government’s simply run of patience with Greece and even the best plan might go unheard at this point.
However, while selling such assets to a special vehicle might be possible, it’s really worth considering the problems with this particular proposal. For a start, Greece hasn’t earmarked €125bn of assets. It’s previously identified €50bn for sale between now and 2015. (What the plan is now, we have no idea.)
Looking at that €50bn relative to GDP and the intended pace of sales, this means that the intensity of privatisation will exceed that which occurred in European economies emerging from the Iron Curtain in the 1990s. Isn’t there a political risk here?
Anyway, let’s take a look at the proposed structure.
The Asset Pool
Greek assets are mostly property. As John Dizard has written before, that means being sure about land zoning, legal title, registries — things you might not really expect from Greek bureaucracy. Caveat emptor, even for an SPV. Yes, those too can sometimes be reasonably expected to make sensible buying decisions.
There are other problems — the SPV would also maintain stakes in Greek banks for a long time. That is, it will own a big downside risk from a Greek sovereign default over that period. In short, there’s a lot of detail in the proposal about running the SPV “to leverage best practices in restructuring, asset management and placement” but above all, the SPV hands over all this cash upfront in return for a Greek promise not to obstruct the privatisation process.
The “Investors”
The proposal suggests splitting up “group assets” into participating interests in categories like banks, industry, utilities, etc. And who are the investors? A “European facility (potentially under the EFSF program”. Or: “Details? We’ll get to those later.”
The problem with identifying willing investors aside, keep in mind that the goal with this seems to be active management of the assets held by the SPV in order to maximise value and avoid fire sales. Good idea. When are the assets going to be sold then?
Avoid fixed sales closure dates to reduce market pressure from vulture funds.
Great, it’s the mother of all prepayment risks. Model that, quants!
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But anyway, these problems with Greek privatisation have been known for ages. What we find fascinating is the structure, and goals, of the debt buyback. For instance, much is made of reducing the ECB’s ‘exposure to Greece’ to zero, by which we think they mean the €49bn Greek bond purchases through the Securities Markets Programme, and maybe not including bonds pledged by banks at the ECB’s liquidity operations. The nature of the buyback isn’t clear. Do they buy back at the ECB’s own purchase price? At the bonds’ par price, probably allowing the ECB to register a gain (it bought into a distressed market)? Buying at current market prices would by contrast lock in losses. Roland Berger also mention buying bonds off the EFSF, which has no current exposure in this form.
It’s probably just us — we’ve become wary of official creditors moving towards protecting their own recoveries over reducing Greek debt to sustainable levels, recently. But it’s striking that there’s nothing here about buying back toxic levels of Greek debt from banks (the Greek banks are promised a “value gain” in their holdings. Why not convert them into cash?).
So, it’s a plan, it has lots of detail, but we’re not greatly convinced. It’s actually a sign, if anything, that the time for grand plans is over. We’re confused by this kind of objective as well:
This transaction would effectively repel speculation targeted at other European Union member states as well, since speculative investors (who do not trust European governments and institutions to come up with a creative solution or have the strength to toe the line) would suffer severe losses triggered by falling CDS spreads
Great, burning the evil CDS speculators. In the meantime, no one’s buying the actual bonds.
By Joseph Cotterill and Lisa Pollack
Related link:
Privatisation without representation - Yanis Varoufakis (May 2011)