Greek covered bonds to the rescue?

Posted by Tracy Alloway on Jun 27 09:28.

A counter-intuitive headline, to be sure, given that Greece has just one publicly outstanding covered bond left (but over €12bn of ‘retained’ covered bonds used as fodder for central bank liquidity).

Hidden in the details of Greece’s planned privatisation fund are a few interesting tidbits. For a start, it looks like the fund will be able to issue bonds, possibly with a Greek government guarantee. It could then use proceeds from issuance to buy back debt, offer exchanges or set-up other guarantees.

Credit Suisse recounted last week how the fund will legally be a ‘societe anonyme’ (SA) which is a foreign-language way of saying that transferring assets to the fund is irreversible, even by law.

Here’s Nikan Firoozye at Nomura with what this might mean:

These may give clues to how (some) EU authorities envision a possible solution to the Greek conundrum (while many other proposals are now circulating, see, for instance Le Figaro, link). In particular if the fund issues bonds (possibly government guarantee for ECB repo or possibly EFSF operations), these will be effectively local-law covered bonds.

We have thought for some time that the EUR50bn in privatisations over the next five years would not make for EUR50bn in cash receipts, and suspected that this was meant to be a vehicle for a Brady-style issuance, or for collateralisation of EFSF loans but this framework appears to allow for both simultaneously.

If the fund issues bonds with coupons at the EFSF funding rate, and the EFSF buys these bonds primarily (effectively getting collateral, in line with demands from Finnish PM Katainen, see link) then the Fund could buy GGBs of the same tenor, and if Vienna-initiative bondholders roll into this same issue (according to De Tijd, Belgian insurers and banks were being asked to roll their maturing GGBs into bonds with the same coupon as EFSF loans… ), we would have a first GGB+ auction, resulting in a type of Brady bond, partly collateralized by privatisation assets.

The fund currently has no assets, but carries the promise of receiving some EUR50bn over the next five years, and possibly more thereafter. Given the likely size of upcoming programmes, this would not result in fully collateralized bonds, but it is a credit enhancement to GGBs nonetheless. Being a local-law covered bond prevents Greek eurobonds from attaching to it, and making undue gains.

While it is unclear whether it is intended to be used in the near future (given that it currently has no assets but will effectively offer a promise of future collateral), or for a longer-term hard restructuring operation, it is clear that the Privatisation Fund is intended to be an element of the solution and may be truly integral, should the market and politicians give time for it to be tested.

Even if the privatisation fund itself isn’t the solution, Greece’s ambitious sell-off targets now look to be the thing to which the country’s hopes are harnessed. It’s worth noting that of the government’s €78bn austerity package, just over a third actually comes from austerity measures.

Some €50bn is of course privatisation.

Greece’s parliament will vote on the great Greek garage sale on Tuesday.

Related links:
Maybe Greek MPs would be right to say no – Wolfgang Munchau, FT
Shouting Greek roll-over, whispering Brady bonds – FT Alphaville

This entry was posted by Tracy Alloway on Monday, June 27th, 2011 at 9:28 and is filed under Capital markets. Tagged with , , , , , , .

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