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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

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