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One Version

by afew Tue Apr 13th, 2010 at 04:53:27 AM EST

Here's one version, from NRC Handelsblad, of how a deal was (maybe?) reached on lower-than-market-rate loans for Greece. As Germany, flanked by the Netherlands and Austria, continued to insist that Greece should pay market rates (up to 7% and possibly rising) for any loans from European partners, the phone began heating up between European capitals:

nrc.nl - International - Europe - EU bails out Greece after final push from markets

Between phone calls, the French and Italian presidents met face to face. They worked out a deal with ECB chairman Jean-Claude Trichet that would entail Greece paying around 5 percent interest over bilateral loans from all other European countries. This is higher than the rate the ‘super strict’ IMF usually charges, but far less than the interest Greece was paying by the end of last week. Sarkozy and Berlusconi did not want to wait any longer for the Germans who, they feared, wouldn’t start showing some leniency until May, after the German regional elections, which chancellor Angela Merkel intends to win. Merkel also objected to the 16 eurozone countries taking a decision, and kept insisting all 27 EU member states got involved. The French and Italians reportedly agreed that they could be first to offer Greece loans, granting Merkel some more time. Merkel thus lost the initiative she had held in the Greek bail-out debate for months. It wasn’t until Sarkozy, Berlusconi and Trichet sealed their secret deal on Thursday night that she understood the gig was up, and she dropped her demand for a 6 percent interest rate. To offer Merkel a graceful exit, Juncker talked down the importance of the 5 percent interest rate on Sunday, calling it “anything but a subsidy”. After all, there are a lot of Greek state bonds sitting in German banks.

The effect on Greek difficulties is moot. But the effect on Merkel's political cred in her own country? Apparently disastrous.


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that sanity prevailed over pigheadedness. But I fail to see why the Germans didn't let the French and Italians bail out Greece without them, if they were so worried about wasting German money... because it wouldn't have shown Germany in a worse light than before, would it?

5% is actually a number close to German wishes than what would have made full sense. At least it's probably a number that Greece can live with.

It's a good compromise, overall, it can even be spun that way.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Tue Apr 13th, 2010 at 05:36:45 AM EST
There goes the crowd.  I am their leader.  Therefore I must follow...

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Apr 13th, 2010 at 06:40:12 AM EST
[ Parent ]
Yes, I find that particularly strange - why would Merkel put her political position on the notion that "hardworking Germans shouldn't pay for lazy Greeks" and then turn down a plan where France and Italy do the bailing out?
by Metatone (metatone [a|t] gmail (dot) com) on Tue Apr 13th, 2010 at 09:25:07 AM EST
[ Parent ]
If Germany doesn't contribute they can't claim to be supporting the rest of Europe all by themselves.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 09:41:46 AM EST
[ Parent ]
It's a lot better than what was happening before. But wrenched from Merkel by a Sarko-Berlu tandem, it speaks volumes of the lack of statesmanship in Europe at the moment.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Apr 13th, 2010 at 09:29:27 AM EST
[ Parent ]
Before the weekend the Spanish press was claiming Zapatero (as rotating Council president) was trying to press other countries to come to an agreement on Greece.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Tue Apr 13th, 2010 at 09:40:45 AM EST
[ Parent ]
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 ]
I have been perusing some of the Greek related articles this morning and found some pretty funny stuff.

http://blogs.wsj.com/indiarealtime/2010/04/13/greece-strikes-again/

Just as bankers were beginning to hope that Greece had finally ceased to plague their deals, Union Bank of India decided not to go ahead with a deal immediately at the end of its dollar bond roadshow.

Here, Greece is to blame for a bond deal gone bad for an Indian Bank. Now, I know that there is a limited amount of money out there for investment, but the world is pretty big. Surely, the $1.5 billion Greece sold yesterday did not suck all the money out of the world.

Another one:

http://www.usatoday.com/money/world/2010-04-13-greece13_ST_N.htm

"Think of it this way: A German worker is being asked to work a little longer to let a Greek civil servant retire a little earlier," says Marc Chandler, senior vice president of Brown Bros. Harriman.

Greece did raise its retirement age for civil servants from 61 to 65. Germans though still retire at 67. Yet, all the money that Germany pays into Europe each year is subject to the same dynamic since not many European countries have a retirement age of 67. Not to mention the fact that either way, a Greek worker is going to collect money for the state, whether they get 12k euro from their gov't employer, or 12k in social security.

But, I wonder if Mr. Chandler had voiced similar opinions about TARP? "Think of it this way: American children will be asked to work harder in the future so that I can keep my well paying job."

Then this one takes the cake: http://www.cnbc.com/id/36461833

I read that Greek hairdressers can retire at age 52 since they work with dangerous chemicals. I figured that it was a joke but I'm told it's for real.

Now, unless hair is part of the Greek civil service, this guy makes little sense. Next we'll hear that Greek dogs live in air-conditioned doghouses. According to cats living in NYC's Battery Park.Mr. Farrell doesn't have a hair dresser, so he must not realize that hair dressers can retire at the age of 51 in any country.

The laughs just keep on coming.

by Upstate NY on Tue Apr 13th, 2010 at 12:10:39 PM EST
Yeah, they're having a field day.

Brown Brothers Harriman, huh? The Bush family Nazi bank? They're experts on Germany, for sure.

<mutter mutter where'd I put that guillotine..?>

by afew (afew(a in a circle)eurotrib_dot_com) on Tue Apr 13th, 2010 at 12:31:45 PM EST
[ Parent ]
Blame the NYT for the last one:


Vasia Veremi may be only 28, but as a hairdresser in Athens, she is keenly aware that, under a current law that treats her job as hazardous to her health, she has the right to retire with a full pension at age 50.

"I use a hundred different chemicals every day -- dyes, ammonia, you name it," she said. "You think there's no risk in that?"

by Detlef (Detlef1961_at_yahoo_dot_de) on Tue Apr 13th, 2010 at 12:36:19 PM EST
[ Parent ]
Are we talking about social security here?

That certainly is ridiculous but I can't follow the article. The article makes claims about unions getting these sweet deals for workers, so are we talking about union pensions? And what union negotiates with the gov't over hairdressers. There doesn't seem to be clarity in that article, and it's surprising since the writer is Greek, and he doesn't seem to be aware that the Greek retirement age for gov't workers has been raised, as has the age for social security, and gov't pensions have been slashed. I know that was written over a month ago, but the changes came prior to that.

by Upstate NY on Tue Apr 13th, 2010 at 12:42:10 PM EST
[ Parent ]
I should add that this is all moot anyway since both in German papers and the FT article I linked to above, it's pointed out that Germany will profit from the loans.

One area that Greece could legally take German money to fund this woman's hairdye risks is by applying for the $20 billion in EU funds allocated to it for the period of 2007 to 2013, but reports are that Greece is so dysfunctional that it only manages to secure 10% of its allocation, as opposed to 70% in Belgium, 70% of a much larger pie.

by Upstate NY on Tue Apr 13th, 2010 at 12:45:18 PM EST
[ Parent ]


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