Tag: European Financial Stability Facility

Categories
Economics

[2515] Watch out for those CDS

For those who have been following the Greek crisis, they know that March 8 is the deadline for the bond swap that is essential in ensuring an orderly default of Greek bonds. Just 12 days later, Greece is due for repayment that without any haircut to its bondholders, there would be a chaotic default.

The bond swap plan is essential in keeping Greek public finance under control, however arbitrary the preferred debt-to-GDP ratio is. According to the Debt Sustainability Analysis paper dated February 15 leaked during the Greek debt negotiation, a 5% reduction in bond swap participation will increase the debt-to-GDP ratio by 2%. And the baseline assumes 95% take-up rate to reach 129% debt-to-GDP ratio. The magic number is 120% and in order to achieve that ratio, the take-up rate has to be high.

Here is the problem. Some bondholders may have bought credit default swaps in anticipation of a technical default some time back. It is in their best interest to not participate in the Greek bond swaps and trigger the CDS. Participation in the swap will not trigger the CDS.

The deal with the CDS is tricky. I myself am a bit unclear if holding  the precarious Greek bonds until maturity and default will actually trigger the CDS. A broker told me just now that there are so many CDS with varying conditions that it is impossible to know just which CDS will trigger. Ultimately, what is unclear is which is better: the haircut bonds or the payout from the CDS?

I am betting some will in event of plain old default and that will be the reason for some to reject of the bond swap deal. Big enough a rejection and we will find ourselves in a financial whirlwind all over again.

Categories
Economics

[2476] Postponing the European crisis to 2013

I am in the opinion that the expected sovereign debt and banking crises in Europe have been postponed to the end of 2012 or early 2013. There are two reasons why I think so.

The crisis in Europe is essentially two-fold. One is due to government debts. Two is the risk of default by European banks. The two sides are interrelated but it is useful to separate them.

The sovereign debt crisis has been postponed thanks to the establishment and the expansion of the European Financial Stability fund. The EFSF would not be exhausted until the end of 2012 even if all debts repayment or refinancing by the infamous PIIGS (Portugal, Ireland, Italy, Greece and Spain) is financed through facility. The potential rating downgrade of sovereign debts of stronger economies, namely Germany and France, may hurt the likelihood of success of on the EFSF front but I will wait until that actually happens.

I am taking this position because by December 2012, total principal and interest payments made by the PIIGS government is projected to be EUR700 billion. That is below the total size of the EFSF.

The following graph shows principal and interest payment obligation of all the PIIGS government cumulatively. Looking at it, without the more permanent European Stability Mechanism which is supposed to kick start in the middle of next year, trouble will come only around February or March 2013.

The banking crisis meanwhile has been postponed until next year thanks to the soft loan facility provided by the European Central Bank. It has been reportedthat banks in Europe will require EUR700 billion next year to pay up their debts. Since the facility offered by the ECB is at the moment limitless (there will be a limit because already the total loans made by the ECB attract considerable question), the problem on this front too has been postponed to 2013.

This of course says nothing of recession and economic recession is another issue altogether.

Categories
Economics Politics & government

[2454] Oh, Papandreou the socialist, the coward, the opportunist

If I were a European taxpayer seeing my money being used to bailout a near-bankrupt socialist government due to outrageous spending while I live responsibly, I would be angry. Why should I be the guarantor of a profligate? But if I wanted the Eurozone to stay intact, I would bite the bullet and angrily pay for the bailout.

If I were a European taxpayer funding the bailout, I would be fuming mad with the Greek Prime Minister Georgios Papandreou’s referendum plan. After all the hassles and the blows punched to get the money, however insufficient it is for the whole of Eurozone, Papandreou hides behind the angry masses, trying to deflect blame from the Greek government to the benefactors of the bailout facility.

The Greek government is a bunch of coward socialists, refusing to own up for its mistake, too insignificant to be bold and solve it. Papandreou may say it is done in the name of democracy, but he forgets the adjective representative. He could easily do it but no. He is afraid of the political cost and so he adopts direct democracy and gambles the whole structure for his own convenience. He wants to refresh his mandate but he has his mandate already. This is about passing the buck.

Oh, he is Papandreou the socialist, the coward, the opportunist.

But I am not a European. Yet, I am very angry at the Greek government.

I hope Greece burn. Let Papandreau fiddles while Greece burns, as Nero did when Rome did. Let us see how bad the austerity plan compares to a complete bankruptcy. Let Greece be demoted to the third world. On with the natural experiment on the socialists.

Categories
Economics

[2451] Damned if you do, damned if you don’t

The holders of $22 billion in Italian CDS may be growing anxious after receiving news that a 50 percent haircut on Greek debt will fail to trigger a credit event that would force sellers of the swaps to pay out.

[…]

If this failed to trigger a CDS event, many investors may find themselves without protection, potentially triggering substantial and unexpected losses.

More broadly across Europe, DTCC data show that net notional CDS outstanding for France, Italy, Germany, Spain and the U.K. total nearly $100 billion. [Michael McDonough. Efficacy of CDS in doubt. Bloomberg Brief: Economics. October 28 2011]

Categories
Economics

[2443] Guess who?

Nope ladies and gentlemen. It is not Germany. Despite voter backlash and political discontent, Germany went ahead. What is EUR211 billion among friends?

Nay. It is not the Netherlands. The Dutch were vocal but voted for it anyway. What is another EUR44 billion?

No, it is not Finland. For all the demand for collateral, Finnish lawmakers said “yes, let us do it.” Who cares for another EUR14 billion?

Sixteen countries passed the amendment to the European Financial Stability Facility, seeking to expand the facility from EUR440 billion to EUR780 billion.

It has to be Slovakia. Slovakia has to say no. Slovakia has to say, we have arrived.

That notwithstanding, the market is relatively pretty cool about. There was no panic. I half expected a storm. The market is probably expecting Slovakia to pass the EFSF amendment regardless.

Not that it will be enough, if Italy goes under anyway…