Greece may have an ongoing issue or two, but that didn’t stop its government debt rallying 274 per cent in the second half of last year. Clearly, the driver was the reduced likelihood of it leaving/being kicked out of the eurozone, rather than the (dismal) economics.
Gabriel Sterne at Exotix says the run was one of the “most astounding sovereign bond rallies of all time”, but that the bonds are now over-bought. The declining possibility of a Grexit, he says, is more than fully priced in (his emphasis): Read more
We assume this is just while the PSI is underway and follows S&P’s selective default move overnight. From the ECB on Tuesday….
The Governing Council of the European Central Bank (ECB) has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations. This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer. Read more
The IMF has turned up pressure on European officials to take on more of the burden of filling a widening gap in Greece’s budget by pressing the European Central Bank to take a hit on its €40bn in Greek bond holdings, the FT says, citing unnamed eurozone officials said. The ECB bought the bonds at below face value as part of a programme to prevent the collapse of Greek debt markets in 2010. It has also been accepting Greek bonds as collateral for cheap loans to teetering Greek banks. The bonds, with estimated yields in excess of 7 per cent, will provide a big return if Greece does not default and they are held to maturity. An IMF official denied the fund was pressing the ECB to take writedowns on the bonds. But eurozone officials involved in the discussions said the pressure to earmark potential gains to fill Greece’s financing hole was being fiercely resisted by the ECB.
Greece’s international creditors are considering an appeal to the French and German leaders to break a deadlock in negotiations over the size of the losses to be taken by banks and other bondholders as part of a €100bn deal seen as crucial to bringing the country’s debt under control, says the FT. This follows a breakdown in talks between banks and official investors on Friday. Citing people close to the negotiations, the newspaper said much of the agreement had been in place for several weeks, but that a final deal had stalled over the coupon payment for new 30-year bonds to be issued by the Greek state. Greek debt managers had agreed with bondholders on a coupon just below 5 per cent but creditors last week proposed a much lower interest rate. Germany has proposed a 2-3 per cent coupon that would increase bondholders’ losses from 60 per cent to more than 80 per cent in net present value terms. Charles Dallara, the IIF’s managing director, told the FT on Sunday that he believed an agreement in principle needed to be completed by the end of this week if the restructuring deal was to be finalised in time for a €14.4bn Greek bond redemption due on March 20. “[Ms Merkel and Mr Sarkozy] and all the European heads of state said they wanted a deal with a 50 per cent [haircut] and a voluntary agreement,” Mr Dallara said. “Some of their own collaborators are not following that decision.” Greece’s finance minister, Evangelos Venizelos, says talks with the IIF will recommence on Wednesday, reports the WSJ.
One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country’s debt restructuring if losses are too deep, the FT says. Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt. “Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome,” Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. “Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 per cent.” Vega, which has resigned from the steering committee, declined to comment.
Negotiators for Greek debt holders have offered to swap their bonds for new ones worth half their current face value, but only if the new bonds contain high interest rates and have extra incentives, including annual payments if Greece’s economy recovers. The offer, contained in a “confidential” proposal presented to Greek authorities on Sunday and obtained by the Financial Times, also insists the new bonds be issued under British rather than Greek law, which would prevent Athens from forcing fresh losses on bondholders in the future.
BNP Paribas, France’s largest bank by market value, reported a 72 per cent drop in third-quarter net profit after being hit by a hefty write-down on the value of its Greek government bonds, the Wall Street Journal reported. The Paris-based lender said net profit in the three months ended September fell to €541m ($743.7 m) from €1.9bn a year earlier. Revenue fell 7.6 per cent in the third quarter to €10bn from €10.9 bn a year earlier. BNP’s net profit was well below analyst forecasts of €876m. The bank reduced the value of its Greek sovereign bonds by 60 per cent, more than the expected 50 per cent cut mandated under the European Union’s new deal to stem the euro-zone debt crisis, the Journal notes. That saw BNP Paribas take a €2.26bn charge on the bonds, while booking a €362m loss from the sale of sovereign debt. To help comply with new capital rules, BNP Paribas is accelerating the reduction of its trading book, says Bloomberg. In the third quarter, the lender trimmed $20bn of corporate- and investment-banking US dollar needs, mostly through cuts in capital-markets businesses, it said.
European leaders on Friday received some interesting weekend reading.
FT Alphaville has also taken a look at “Greece: Debt Sustainability Analysis”, an assessment prepared by European Commission economists for discussion on Friday among European finance ministers. We’ve put it in the usual place (and extensively quoted excerpts below). Read more
Belgium’s nationalisation of the domestic operations of Dexia was formally agreed in the early hours of Monday by the bank’s board of directors and the Belgian government, along with state guarantees worth €90bn ($120bn) to finance the rest of the group, the FT reports. Brussels will pay €4bn to take over Dexia Bank Belgium, which includes a large retail bank in a group which is otherwise focused on lending to local governments. The forced divestment is the first step in the dismembering of the Franco-Belgian bank after it fell victim to a liquidity squeeze prompted by the eurozone debt crisis. Dexia’s management was instructed by its board to start negotiations to pair its French municipal loans business with the Banque Postale, a bank tied to the postal system, and the Caisse des Dépôts et Consignations, the French sovereign wealth fund that owns stakes in both Postale and Dexia. According to the Wall Street Journal, the Belgian government’s offer for Dexia Bank Belgium includes a mechanism to pay a premium to current shareholders if the government sells the business within five years. For more see FT Alphaville.
French auditors have been lambasted by the UK’s leading accountancy regulator for their performance during the Greek debt crisis. Stephen Haddrill, chief executive of the Financial Reporting Council, criticised the way French banks and insurers had been allowed by their auditors to post smaller losses on Greek government bonds than some European rivals. Mr Haddrill told the FT the lack of “strong auditing” there showed that moves to introduce a more French approach to auditor regulation across the European Union were misguided. EC proposals for a new approach to auditing leaked last month included measures to force big companies to have more than one auditor and banning some auditors from doing consulting work for clients. The French banks’ stance has also been challenged by Hans Hoogervorst, chairman of the International Accounting Standards Board.
From Tuesday’s FT — some letter-writing:
Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules. In a letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt.
Some European financial institutions should have taken bigger losses on their Greek government bond holdings in recent results announcements, according to the body that sets their accounting rules, the FT says. In a private letter sent to the European Securities and Markets Authority, the European Union’s market regulator, the International Accounting Standards Board criticised the inconsistent way in which banks and insurers have been writing down the value of their Greek sovereign debt. Separately, the FT also reports that on Monday two top European officials went before parliament to defend the region’s banks.
Much like the rating agencies, many auditors have suffered a crisis of creditability in recent years.
That will make their reaction to the IIF’s proposed financing offer for Greece all the more interesting. Read more
Hey European banks! Have you seen this?
[International Accounting Standards IAS39 - Paragraph 59] A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment. Rather the combined effect of several events may have caused the impairment … [these events can include] a) significant financial difficulty of the issuer or obligor; …
Because some day you might want a detailed breakdown of how Europe’s banks are accounting for their Greek, Spanish — and even Italian — bonds, here’s a helpful table from Deutsche Bank.
It comes from Mohit Kumar and Abhishek Singhania, who’ve crunched the stress test data: Read more
Greek borrowing costs jumped to euro-era highs after a European Central Bank council member said that a short-term “selective default” by Greece might not have “major negative consequences”, the FT reports. The comments by Ewald Nowotny, Austria’s central bank governor, sparked a jump in two-year Greek borrowing costs of nearly 5 percentage points to 39.24 per cent at one point, one of the biggest daily leaps since the country joined the single currency. The Austrian central bank later clarified Mr Nowotny’s remarks, saying he was fully in agreement with the position of Jean-Claude Trichet, ECB president, who has warned that any default by Greece would result in its bonds not being accepted by the ECB as collateral. This helped the Greek bond market regain some of the losses, with two-year yields easing back to 39.02 per cent, up 4.55 percentage points on the day. Greek two-year bond yields have risen by about 12 percentage points since the start of July because of uncertainty over a second bail-out for the country. Meanwhile in Spain, borrowing costs also surged as the country sold €3.79bn ($5.4bn) of 12-month bonds at an average yield of 3.702 per cent, significantly higher than the 2.695 per cent paid last month.
You know, a certain FT reporter took a lot of shtick for a this article.
The gist — European sovereigns were increasingly turning to the kind of pre-crisis financial engineering to shift them out of crisis. The European Financial Stability Facility, you’ll remember, was often likened in principal to a giant Collateralised Debt Obligation, with its emphasis on credit enhancement. Read more
Confused about the French proposal for Greece? Everyone seems to be.
Here’s what we know — or at least, what we think we know given that nothing has been made public. Read more
You should all now be familiar with the EU ‘Brady bonds’ plan for Greece.
But what are the pros and cons of this French-led initiative? Read more
Roll-over, roll-over send … no one right over?
Citi argues on Friday that getting the holders of shorter-term Greek debt to roll-over their holdings into longer-term bonds will be no easy feat, even as the eurozone seems to be pressing ahead with the plan. Read more
Interesting Q&A over at UBS earlier this week, concerning a voluntary roll-over of Greek bonds:
Question [from an emotional anonymous]: … this business of a voluntary versus a mandatory default seems to me kind of silly. Why are the authorities even talking about a three-year voluntary extension? That’s going to be called a default event. All these financial institutions in Europe that think they’re protected from this are not going to get payouts, and they’re going to get bonds that are lower quality; that have lower rating. So I don’t understand why they’re even talking about a seven-year versus a three-year. If they were talking about a zero-year or a 10,000-year, I would understand that, that’s at least logical, but there’s really… I don’t see the difference there. I mean, I don’t think anyone sees the difference between an orderly and disorderly. The only way to have an orderly is you close markets for a week and you announce it today and it’s all done at the end of the week, but… So my second question is, why are they even talking about a three-year versus a sevenyear, and why is a three-year good? It seems to me just as problematic as a seven-year. Read more
A German-inspired plan for a maturity extension of Greek government bonds could force eurozone governments to provide up to an extra €20bn to avoid a meltdown of its financial sector, according to a briefing paper circulated by the European Commission. The paper, seen by the FT, warns European finance ministers the extra money may be needed to recapitalise Greek banks as the extension would be classified by rating agencies as a “selective default”. It also says that if the ECB does not accept the downgraded bonds as collateral, all Greek collateral – some €70bn – may need to be replaced. Meanwhile Bloomberg reports that disagreement over the second Greek rescue may see talks between finance ministers drag on into July.
Greek basis trades, that is. About a year ago, banks first started recommending negative basis trades — which saw investors buying a (cash) Greek bond and then taking out insurance (CDS) on the holding. It only works once spreads in the CDS market are lower than in the cash market, something which rarely happens and tends to get arbitraged out quite quickly. To paraphrase Reuters blogger Felix Salmon, you are buying the bond, fully insuring it, and locking-in risk-free profits just by holding to maturity. Read more
Or, what happens when European ministers continuously and very publicly talk about Greece.
From Citigroup’s Mark Schofield: Read more
Gotta love this straight-shooting piece of research from Alliance Bernstein.
The word “re-profiling” comes straight from “Newspeak“, the communication model employed by the Ministry of Truth in Orwell’s 1984. The one thing that is clear about re-profiling is that it does not include haircuts to the principal of the debt, but alterations to the maturity and potentially also to the coupon of the bonds.
Cut, paste and mail to your favourite holder of Hellenic debt:
Or, losers in a Greek debt restructuring.
Some estimates courtesy of JPMorgan’s flows and liquidity team: Read more