Europe’s big box-ticking exercise

Posted by Tracy Alloway on Jun 23 10:34. 5 comments | Share

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. 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.

Answer [from UBS European rates strategist Andrew Rowan]: I think, yes, the point you touched on is correct. It’s not going to impact Greece’s solvency materially in any way. And in fact, you could argue that any measure that did impact or improve Greece’s solvency would almost certainly be a CDS trigger.

In the near term, I think you could probably look at this as being really more of a box-ticking exercise. Parliaments in core Europe cannot go back empty-handed having written cheque for a second aid package. They need to point to form of voluntary involvement so that these things can get passed, or get past the taxpayers. And clearly, as you say, what if there is no postponement, or there is not a sufficient level of participation from the private sector? Then in that case, it’s going to be quite difficult. I think that’s the kind of thing that could be kicked further into the future once the initial amount of aid outstanding from the current package, which is probably around EUR57 billion would drop to around EUR45 billion after the dispersal of the next tranche. That could be certainly used to offset the load (?) for the time being, but further down the line, this will be certainly problematic.

I think what policymakers are trying to do is just simply buy enough time because number one, other peripheral states have made primary balance adjustments and are moving towards a primary surplus; and number two, the slow process of recapitalisation of the European banking system is sufficiently advanced that banks are insulated against the effects of any debt restructuring at some point in the future. And of course, as Stephane points out, we all know that at some point a coercive restructuring with principal haircuts will need to take place, and that’s certainly been the experience in the EM sphere where voluntary restructurings have often been followed further down the line by full on principal haircuts.

As of Thursday, it looks like a five-year (and unsweetened) roll-over might be on the table.

L’Echo and De Tijd are reporting that Belgium’s central bank has opened discussions with lenders including Dexia, KBC and Ageas, in an attempt to convince them to voluntarily extend their holdings of Greek bonds by an additional five years. Half-way between the three- and seven-year duration discussed above. Talks are also underway in Germany, according to the FT.

So consider that giant Greek-shaped box ticked?

Though it’s worth pointing out that Rowan’s UBS colleague, economist Stephane Deo had a slightly different take on the roll-over. He reckoned Greece has around €330bn of outstanding debt, with the private sector holding about €200bn of that. And about half of that is held in Greek itself.

Which means… :

So if you have a voluntary rescheduling of Vienna initiative, whatever you want to call it, you could roll almost half of the Greek debt that gets to maturity. And as [UBS Greek bank analyst] Alex [Kyrtsis] said, probably the Greek banks have a high concentration on the short dated paper. So half is… well, if it’s close to half, even if it’s EUR130billion, that is far from negligible. Why is that far from negligible? Because I told you that the EUR110 billion package would be enough to finance Greece to August next year, so if you look at the detail of my numbers, actually, out of the EUR110 billion, you use almost EUR70 billion, so almost two-thirds just to repay debt that is maturing. So if you manage to roll a significant share of this debt, actually, that would extend the bailout package by quite a significant amount of time. Again, I would go back to what Andrew said. It does absolutely nothing in terms of helping Greece, helping the solvency of Greece. I would absolutely not change my call that at some point you have to do a default etc. But you see, an extension of the debt, even if it’s only for the Greek investor, is something that could help a lot to gain. And it’s only gaining time, I agree, but that’s one thing to keep in mind.

Time, we would add, that might be more essential for other European peripherals.

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