So we have a deal. Do we have a deal? We
have a deal. Well, kind of, but the finance
ministers haven't signed off on it as yet. It may
therefore change before you read this. It most
certainly will change after you read this,
irrespective of whether you read this on the
intended publication date (February 10) or many
months later. Welcome to the evergreen world of
European sovereign debt restructuring.
This week's deal may or may not have been
agreed? You see, here's how it is supposed to
work. We give the Greeks 130 billion or so - no
need to put a currency sign in front of the 130bn
because it doesn't really matter. In return, the
Greeks agree to 3.3bn of austerity - that is,
budget cuts to that extent. No need to put a
currency sign in front of this 3.3bn either,
because it could
be in baklava for all
the good it will do for you anyway.
In any
case, the 130 billion will be given to people to
whom the Greeks owe money, not to the Greeks
themselves. So it will be transferred from the
European Central Bank (ECB) offices in Frankfurt
through the clearing system in Frankfurt to banks
in Frankfurt, and perhaps to the odd bank or two
that dare to have branches in Paris or London
instead. So to be clear, nothing will go to Athens
anyway.
The Greeks also get some book
entry adjustments. Instead of owing debt that
looks like Mount Everest (this being an Asian
publication), they will instead owe debt that
looks like Mont Blanc. Even that mountain of debt
will be worth, in terms of intrinsic purchasing
power thanks to the below-market coupons they have
to pay on it now and the next round of defaults,
about the same as a pile that is as high as the
average speed bump in Singapore but that is the
denouement in the next act and one shouldn't rush
to it quite yet.
Still with me?
Marvellous. So these book entry adjustments are
meant to lop 70% (50% from the principal balance
and the rest from the losses suffered by the
comically low coupon on the now-restructured debt)
off the money owed by the Greeks to the private
sector creditors, but they will be done
voluntarily so that a miniscule amount of credit
default swaps (CDS) outstanding on the debt is not
"triggered". So an official sitting in Brussels
(or is it Strasbourg?) gets to tick a box that
says "Destroyed a useful little market that dared
to speak the truth about European sovereigns".
Meanwhile, official creditors will get
seniority so that they won't have to take any pain
from this write-off. So that leaves the
International Monetary Fund (IMF) and bilateral
government aid donors (step forward, China)
without the need to write off their debt. For IMF
functionaries, this is useful because you don't
have to write 100-page memos to the bosses
explaining what happened (even if the situation
was caused by those same bosses in the first
place). Its even better for the central bankers
from Asia or the Middle East because they, quite
literally, dodge a bullet for buying Greek debt in
the first place. So far, so good.
Except
for the ECB, which purchased a bunch of the
now-worthless debt of the same stock that was
bought by the pirates; oops sorry I mean privates.
It isn't allowed to take direct losses because
that is the same as providing a financial benefit
(this is the world of debt, stop trying to make
logical sense of anything) to sovereigns, which
the rules don't allow. Instead, the ECB would
enter a complicated mechanism wherein it would
take its Greek exposure and effectively exchange
for paper to be issued by the European Financial
Stability Facility (EFSF), which will then package
them into an ABCD to sell to WXYZ. Okay, I may
have made up the last two acronyms but you cannot
be sure of that.
Yes, yes, but what about
the contagion risks you ask, especially now that
it looks like Portugal will be this year's big
casualty. Oh that. Let's not get too wrapped up in
it. You see the ECB has now made it easier for
national central banks in Europe to accept pretty
much any collateral in return for providing money
to their banks.
You remember the
three-year money supplied by the ECB at 1% in
December? Well, there's hundred of billions, if
not trillions, more where that came from. So when
Portugal hits the reef later this year, its banks
will be able to buy government paper, discount
back with the national central bank for freshly
printed money; and pocket the interest rate
differential. Nice living, if you can get the job.
With all that monetary easing on the sly,
we are talking hundreds of billions if not
trillions. Once we talk numbers that big, the
concept of value loses all meaning and you can see
why I have insisted on not using currency signs in
this article.
The Germans are apparently
not too happy because they can't count very well
with big numbers and all this talk of billions and
trillions is proving quite vexing for them
especially as the word "trillion" in German is
spelled as "W-e-i-m-a-r". It also gives them a
nasty nightmare about the chap who came after the
Weimar Republic: a charming gentleman by the name
of Adolf Hitler, to save you the trouble of
looking up Wikipedia.
In any event, debt
frenzy has now caught on in Europe, and there's a
billion in bail-out money available for every
outstretched hand. Amidst the frenzy, no one wants
to listen to the Germans speaking sense. Indeed,
the Greeks celebrated the bailout deal by having
their national newspapers print images of Nazi
flags being raised in Athens; about as clear as
they can get about who they consider to be the
villains of the piece.
Sheesh! You go and
take money out of your pocket to help a fellow man
in need and he calls you Nazi for doing that. The
Germans are a hardy lot, who have impeccable
manners and excellent financial sense. Where do
they see this European experiment going now?
Suddenly, and as if the heavens themselves
sent a message, we have news from Eastern Europe
that provides an answer. With a worsening cold
snap through Europe, the authorities in Hungary
have taken to sending their cash notes to make
fuel billets, that can then be used by the
country's poor to burn and keep themselves warm.
Cheaper than firewood, coal or natural gas,
apparently.
Hungary, you will recall, is
the Eastern European miracle economy that suddenly
found out that printing loads of debt doesn't add
up to an economic miracle. Its old forint aren't
worth a lot these days, hence the move by the
central bank to do something useful with them. At
this rate, there will be surging demand for
Zimbabwe dollars all over Europe, as they seek
things to burn - such as the paper that Greek
government debt is written on, rather than being
collectors' items to be hung in people's toilets
(I have a nice one from their past round of
defaults in mine). Imagine what the ECB can do
with its trillions in euro currency notes in three
years time when the next cold snap hits the
continent. People from the Middle East and Russia,
hoping to sell fuel at outrageous prices to the
Europeans, will be sorely disappointed to learn
about this new energy source.
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