No Matter How Much Room Some May Think Is Available, There Is But So Long One Can Play Hide The Greco-Sausage

By: Reggie Middleton | Tue, Feb 28, 2012
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As I warned last week in Why Greece Bailout Games Will Cause The Rest Of The EU To Break Out The Grease, the games being played in the EU to hide the Grecian sausauge will not end well. To wit, and as reported by Bloomberg... ECB Suspends Greek Debt as Collateral

The European Central Bank said Greek debt will temporarily be ineligible as collateral for loans after Standard & Poor's yesterday cut Greece's credit rating to "selective default."

The ECB "has decided to temporarily suspend the eligibility of marketable debt instruments issued or fully guaranteed by the Hellenic Republic for use as collateral in Eurosystem monetary policy operations," the Frankfurt-based ECB said in a statement today. "This decision takes into account the rating of the Hellenic Republic as a result of the launch of the private sector involvement offer."

While the ECB's risk management rules prevent it from accepting collateral deemed to be in default, the central bank will resume taking Greek debt once a 35 billion-euro ($47 billion) guarantee scheme agreed by European governments comes into force in mid-March. A reduction in Greece's credit rating was anticipated after the country agreed a debt write-down with private sector investors, seeking to reduce national debt to 120 percent of gross domestic product by 2020 from 160 percent last year.

"After the downgrade it was clear this was going to happen," said Christian Schulz, an economist at Berenberg Bank in London. "The ECB isn't going to make an exception to its rule on not accepting defaulted collateral, and this is anyway a temporary arrangement."

The ECB said banks affected by the suspension of Greek debt as collateral can turn to so-called Emergency Liquidity Assistance schemes provided by their national central banks.

Greece published the formal offer document last week for its agreement to exchange bonds for new securities, with investors taking a haircut of 53.5 percent. The Greek government agreed that bonds held by the ECB and euro-area central banks would be exempt from any debt restructuring.

Bullishness in equities is simply uncalled for and shows how true price discovery is lost in today's capital markets.

 

 

I warned, in the video above, that the bullying behavior of the ECB may save it from insolvency but will near guarantee solvency issues for anyone needing market liquidity in the short to medium term. You see, nobody likes to get robbed, as Bloomberg amplifies my statements above - ECB Special Lender Status Threatens Backlash:

The European Central Bank's willingness to ride roughshod over bondholder rights risks pushing up borrowing costs for indebted governments by making investors less willing to lend.

The ECB swapped about 50 billion euros ($67 billion) of Greek bonds for new securities, identical to the old ones in every way save for identification numbers. The switch makes the ECB senior to other investors, exempting it from the largest sovereign restructuring in history as Greece rewrites the terms of its notes to ensure lenders forgive 53.5 percent of the debt.

"Bondholders are effectively being subordinated every time the ECB gets involved -- not legally, but economically," said Saul Doctor, a credit strategist at JPMorgan Chase & Co. in London. "Foreign investors are going to be less willing to buy sovereign bonds when the ECB can exert itself."

I have enabled my professional and institutional subscribers to run their own haircut scenarios on Greece select other members of the PIIGS group. The Bloomberg article above was known to be the case TWO YEARS ago to BoomBustBloggers. See The Ugly Truth About The Greek Situation That's Too Difficult To Broadcast Through the MSM for a public preview of said haircut models.

Check this out!

The ECB's bond exchange with Greece shows how documentation of securities governed by local law can be changed to introduce clauses that reduce investor protection. Private creditors now risk losses both from the likelihood of imposed writedowns and from effective subordination by official lenders, according to Stuart Thomson, who helps oversee $121 billion at Ignis Asset Management in Glasgow.

"It's the subordination of capitalism," he said. "Governments raise money to grow their economies. If that fundraising is subject to governments changing the rules as they see fit, then that's a subordination of the capitalist system."

It costs a record $7.3 million upfront and $100,000 annually to insure $10 million of Greek debt for five years. That signals a 94 percent chance of default within that time, based on investors recovering 22 percent of their money.

Greece and Portugal are now the world's most expensive governments to insure, topping Pakistan, Argentina, Ukraine and Venezuela. Developed sovereigns may be treated more like emerging markets in future because investors will demand bonds be issued under international law rather than the issuer's domestic law, according to Doctor at JPMorgan.

Grecian Tragedy Formula, Bailout Number 3 shows one of the many reasons why Greece will probably need nearly all of its debt wiped; clean, resulting in LGD of nearly 100%. Where have we heard this before? Oh yeah, the BoomBustBlog nearly 8 months, to wit - LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%? I strongly suggest any who dare label me a doom and gloomer read this piece, coming from the same man that called the collapse of Bear Stearns, Lehman Brothers and GGP... Ain't nothing changed! Ignore the truth if you deems such wise...

For those of you who may be bothered by my proclamations on CNBC or that of RT's Capital account, reference what was said in the aforelinked article, to wit:

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

Guess Who Runs the IMF?


LGD: Loss Given Default... ~100%???

We're talking damn near complete wipeouts boys and girls. There are practicaly no entities holding this debt at par that are leveraged under 30x. The starting point in case of default for Greece is between roughly 48% to 52% of par. You've seen the math on BoomBustBlog many a time -Over A Year After Being Dismissed As Sensationalist For Questioning the ECB's Continued Solvency After Sovereign Debt Buying Binge, Guess What!

Bond Comaprison

Add forced subordination due to IMF and US imperialitic dictate, and discussion of recoveries may very well be moot.

After all, and as also pontificated last week (I was on a Grecian roll)...


Contagion Should Be The MSM Word Du Jour, Not Bailouts and Definitely Not Greece!

Soverign Contagion Model

 

 


 

Reggie Middleton

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