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This is a bad deal for everyone and for Greece.

The lectures about moral hazard fall on my deaf ears.

I'm not a banker so I don't know what loans are supposed to go off at, but I know these facts:

  1. The deal was struck at a rate of 4.83% for 3-year bonds. 200 basis points higher than IMF loans.

  2. There is a 50 basis points surcharge added that brings the cost of the loans to Greece to 5.33%.

  3. Greece did a deal just two weeks ago after the last so-called agreement where they sold 5 billion euros worth of 7-year bonds at a rate of 5.9%. The auction was oversubscribed.

  4. In the aftermarket, the bonds headed north from there as investors called the EU's bluff and perceived that the word coming out of Germany was that Greece was not going to be backed. From there the interest rates rose to 7%.

  5. Some economists have analyzed that a 3-year bond at 5.33% implies a 10 year-bond at 7.xx%. If that's so (again, I'm not an expert) one might argue that this deal is actually above the rate Greece was getting in the open market just two weeks ago. I'm not capable of evaluating how many points higher a 7-year bond should be over a 3-year bond, but I'm just guessing that if you're giving 5.33% for a 3-year, then you're going to give more than 5.9% (the rate Greece sold at in the market two weeks ago) for a 7-year bond.

  6. When you parse the wording in the agreement that envisioned a Greek bond at "market rates" you are essentially talking nonsense, since Greece would be pricing in default, at that point. If the market rate produces default, and you will only give Greece money at a rate that produces default, you are pissing away your money.

  7. Wolfgang Munchau at the FT thinks that this will not help Greece overcome its debt problem and that it really constitutes a net transfer of wealth from Athens to Berlin. http://www.ft.com/cms/s/0/762c8ebc-4596-11df-9e46-00144feab49a.html

This is doubly true if you buy the rumors that the price of a deal with Greece was new multibillion contracts for military hardware from France and Germany: http://www.nytimes.com/2010/03/30/world/europe/30iht-turkey.html

News that is doubly hard to understand for Greeks in the midst of an investigation that shows gov't officials were bribed by military industrialists to the tune of $80 million, a bribe that increased the country's debt burden by saddling it with unneeded and unwanted equipment. http://www.ekathimerini.com/4dcgi/_w_articles_politics_100010_12/04/2010_116293

I have been reading that there are several papers coming out analyzing the origins of Greek debt. The authors are leaking that the bloated bureaucracy (average salary 12000 euros) is not the greater part of the problem. A country that lacks industry goes into hock $15 billion a year for military equipment (for many years) and an equal amount of other development (in projects that produce no return) while the projects are awarded through corruption. this amounts to criminal activity at the highest ranks of Greek political life.

It is VERY hard to see an exit given the Greek power structure, the loans to Greece at high rates, etc.

I don't think this was a bad deal for Germany since the loans are short-term, Greece will pay them, and Germany will make money. Long-term, Greece's debt will continue to rise.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100004853/has-germany-agreed-to-uncondit ional-surrender-over-greece-not-yet-i-suspect/

This Telegraph article argues that the loan will not come to pass at all.

by Upstate NY on Tue Apr 13th, 2010 at 09:51:09 AM EST
Some economists have analyzed that a 3-year bond at 5.33% implies a 10 year-bond at 7.xx%. If that's so (again, I'm not an expert) one might argue that this deal is actually above the rate Greece was getting in the open market just two weeks ago.

I don't think you can make such a statement.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 09:55:03 AM EST
[ Parent ]
Which part? The difference of 3 year to 10 year or the latter?
by Upstate NY on Tue Apr 13th, 2010 at 10:12:04 AM EST
[ Parent ]
A 3-year rate implying a certain 10-year rate.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 10:16:47 AM EST
[ Parent ]
I see. That's definitely well over my head but I can say that I did read that from noted economics professors blogging on the issue yesterday.
by Upstate NY on Tue Apr 13th, 2010 at 10:27:49 AM EST
[ Parent ]
There's at best some econometrics under the hood.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 10:33:46 AM EST
[ Parent ]
Probably. I know that the difference can't be the same for every country, but that the size of the current loan is so large ($65 billion for a small country like Greece!) that Greece is certainly able to pay the money for the next few years. That in itself makes a 5.33% viable. But who knows what a bond many years out would look like.
by Upstate NY on Tue Apr 13th, 2010 at 10:50:02 AM EST
[ Parent ]
$65bn is 18% of Greece's 2008 GDP. At 5.33%, servicing the debt will consume 1% of Greece's GDP and require a roll-over of the debt when the debt expires.

The roll-over is more problematic than the actual interest payments.

What this does is set a cap on the interest rate that Greece has to pay for up to $65bn of its debt. As you point out, the latest auction in the open market was oversubscribed at effectively a lower rate (given the longer maturity). Greece may still manage to auction its debt at a lower rate than the one offered by the EU/IMF and only turn to the EU/IMF for any unsubscribed debt. As somebody quoted in the comments, the loan "may not come to pass" and that would be a good thing because it would mean that Greek debt would be priced at a lower yield than this 5.33%.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 11:44:41 AM EST
[ Parent ]
There is a LOT of debt that will need to roll over in 2013-2015. That will make things difficult enough. Add to that problems in Spain, the U.K., Japan, China or the USA....  It is not like we have a stable system of international finance or that real, substantive reforms that would be adequate to the scale of the problems are likely.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 13th, 2010 at 03:53:19 PM EST
[ Parent ]
You can see here the yield of German bonds in the secondary market.
The deal was struck at a rate of 4.83% for 3-year bonds. 200 basis points higher than IMF loans.

There is a 50 basis points surcharge added that brings the cost of the loans to Greece to 5.33%.

For 3 years' maturity the yield for German bonds is 1.34%, making the IMF spread 1.5% and the EU spread 4%
Greece did a deal just two weeks ago after the last so-called agreement where they sold 5 billion euros worth of 7-year bonds at a rate of 5.9%. The auction was oversubscribed.
The yield on German bonds for 7 years' maturity is 2.66%. This makes the market spread at that recent Greek auction 1.23%

Reuters: The yield on short-dated Greek government bonds fell by over a full point on Monday, after after euro zone finance ministers on Sunday approved a 30 billion euro aid mechanism for Greece.

The move took the 2-year bond yield to around 5.9 percent, below the 10-year bond yield, according to traders. That normalised the country's yield curve after it inverted last week on fears over Greece's ability to fund its debt. However, bid offer spreads were wide at around 90 basis points.

...

The Greek/German 10-year bond yield spread GR10YT=TWEB DE10YT=TWEB narrowed to 355 basis points versus 409 basis point at Friday's settlement close. The cost of protecting government debt against default in Greece and other peripheral euro zone member states tightened on Monday, according to credit default swap monitor CMA DataVision.

Note that this means that the yield for 2-year Greek bonds was 6.9%, above the 10-year bond yield (the curve was inverted due to fears over the short-term default prospects). A 5.33% cap on the interest rate up to 3 years helps bring the short-term rates lower though they still remain above the interest rate of the IMF/EU loans.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 11:53:34 AM EST
[ Parent ]
However, bid offer spreads were wide at around 90 basis points.
Note that this means the liquidity of the bonds is very low. The yield may have dropped but there are no takers.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 12:06:23 PM EST
[ Parent ]
I wonder if the net impact of what we're seeing here is that Greek debt--held by German and French banks--is rolling over to Greek banks with every new issue. And the Greek bank is allowed to keep buying because its Greek bonds are cleared as assets through the ECB. In the end, the Greek banks will own a much heftier amount of Greek debt--rather than banks in the eurozone--and that this will be the cutoff point for Greece, the point at which they can conceivably be lead to restructure without other euro countries taking the hit. This would mean the collapse of Greek banks, because it would be absurd to transfer the debt back to the country after this whole fiasco.

But then again, Greece did have a TARP program last year, and from Frank S.'s posts, I'm shocked to discover that Ireland is taking on the equivalent of 60% debt to GDP in toxic paper from its own banks.

Am I reading this wrong? After the Greek banks take on the bulk of Greek debt, they will then transfer that debt back to the nation?

Is this a little like those people who transfer balances from one credit-card to another in endless circles?

I have a relative who does mortgages in NYC and he tells me he has clients who constantly roll-over interest-only mortgages to new ones, and by so doing, managing to cut their living expenses by more than half. You can buy a 800 sq. foot Manhattan apartment for $400k, but that same apartment can cost $2400 to rent. The interest on $400k at current rates is so much lower than rent, even when you add closing costs of $5k for each new loan you take on (interest only is locked in for 5 to 10 years).

Is this what the bankers have cooking for Greece?

by Upstate NY on Tue Apr 13th, 2010 at 12:19:15 PM EST
[ Parent ]
Greek debt--held by German and French banks--is rolling over to Greek banks with every new issue

Where do you see evidence of this? Do you mean the Greek private banks or the Greek Central Bank?

And the Greek bank is allowed to keep buying because its Greek bonds are cleared as assets through the ECB.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 12:25:18 PM EST
[ Parent ]
Greek private banks. Apparently, they are the ones buying massively. I read so many of these articles daily that this nugget of info gets lost, but usually the one to report this is Reuters. The National Bank of Greece ( private bank) is the biggest buyer.
by Upstate NY on Tue Apr 13th, 2010 at 12:36:55 PM EST
[ Parent ]
I think your scenario

I wonder if the net impact of what we're seeing here is that Greek debt--held by German and French banks--is rolling over to Greek banks with every new issue. And the Greek bank is allowed to keep buying because its Greek bonds are cleared as assets through the ECB. In the end, the Greek banks will own a much heftier amount of Greek debt--rather than banks in the eurozone--and that this will be the cutoff point for Greece, the point at which they can conceivably be lead to restructure without other euro countries taking the hit. This would mean the collapse of Greek banks, because it would be absurd to transfer the debt back to the country after this whole fiasco.

is actually a good thing...

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 12:48:36 PM EST
[ Parent ]
If so, then why didn't Ireland try the same method?
by Upstate NY on Tue Apr 13th, 2010 at 12:59:22 PM EST
[ Parent ]
Their banks failed first, and their public debt was relatively low.

Public sector balance + private sector balance = current account balance

Ireland had a hole in the private sector and a healthy public sector.

Greece had a hole in the public sector and a healthy private sector.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 01:05:11 PM EST
[ Parent ]
Yes, I should have thought of that!

So, now, consider: most of the holdings of the Greek banks are in Turkey and the Balkans.

In some Balkans countries, these banks are the major source of liquidity.

It just never ends.

Austrian and Greek banks together have like 85% of external exposure in the Balkans.

by Upstate NY on Tue Apr 13th, 2010 at 01:19:01 PM EST
[ Parent ]

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