Greek Bailout Agreement Truths – The Good, The Bad And The Ambiguous

Contributed to hellasfrappe By Dr. Nick Skrekas,

(Economist, Lawyer and Presenter)
Greek business Today – an effort in need of Diaspora “likes”
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The overnight Troika agreement concluded with Greece is positive in the sense that it averts immediate chaotic default in March, but there are many unanswered questions about the program and the haircut. It is no silver bullet but it is breathing space at a lesser cost.

The Eurogroup Finance Ministers worked until early morning to try to put all the pieces of the confusing puzzle together in a way that would ring fence Greece, make it debt dynamics sustainable and provide certainty and renewed confidence for global markets. But they haven’t actually wrapped up everything yet as reflected in bourse reactions.

Prime Minister Lucas Papademos and Finance Minister Evangelos Venizelos are right that this is an unprecedented bailout deal at Euro 130 billion and there is reason to smile at reducing Greece’s debt load by EURO 103 billion if the Private Sector Involvement (PSI+) works. But there is no reason to be opening champagne bottles.

Conservative leader Antonis Samaras, while insisting on April elections after all the procedurals steps of the bailout are completed, is on the same rhetoric wave length. If the deputies of the two main parties fall in line, then Hellas has bought some time and may avoid a formal bankruptcy and uncontrolled default in March.

Professional investors and market players aren’t entirely besotted with the agreement because there are many unanswered questions. These include the self-destructive austerity strings, the uncertain political developments and whether a voluntary PSI+ will succeed.

Scaremongering international media, already on alerts due to persistent delays, can find enough holes and vagueness in the bailout deal to rain on any potential stabilizing Greek prospects from the 12 hour long overnight talks. They would have been reveling in ruinous reports and high selling doom and gloom if the talks fallen apart. Not everyone wants the European project to work, and Greece is a perfect excuse for those powerful geopolitical interests.

Nevertheless, we must recognize that uncertainties exist at both over the EURO 130 billion bailout, and it is even more treacherous and dangerous over the private Sector Involvement (PSI +) voluntary bond holder haircut.

At the moment the agreement is no more than “a conditional agreement to agree and disburse funds” from the EU and IMF. Only if some pre conditions like successful PSI tendering and many prior policy austerity and reforms are realized.

In seven countries, including Germany and collateral blackmailing Finland, parliamentary majorities have to give the green light to the deal. A hard sell when they have vilified Greeks for two years. In other European nations Finance Ministers have enough authority to approve the deal’s legitimacy, so they should be safe harbors for Hellas.

The PSI tender will kick off on Feb 22 and the tender window will close on March 8. If – and that is a big “if” – all goes well, then the haircut swap will be settled on Sunday, March 12. Anyone that was sucked in into believing that the PSI process would be completed in four days as several venerable international newswires reported, knows nothing about international securities. I still would not recommend anyone bet that there won’t be hiccups and delays.

Lots of arms will need to be twisted to voluntarily accept an about 75% real value loss on Greek bonds and accept an average coupon of no more than 3.65% over 30 years in the swap for new securities. Sadly this haircut may also be imposed on local mom and dad retail investors, which will hurt even if there will be the sweetener of the new bonds being GDP-linked securities and offering some added upside potential if Greece returns to growth.

And incidentally, the news bonds will be regulated by English law, despite convoluted assurances give to deputies that asked the serious and tough questions. Anything else would have been rejected even by the 60% of institutions represented by the IIF’s Charles Dallara. These deputies were led by Diaspora experienced and Harvard educated MP Elena Panariti. The socialist deputy, that served capably at the World Bank for years and advised many distressed countries, highlighted the need to protect Greek sovereignty. Despite that kind of sensitivity to Hellenic issues, because she speaks perfect English and did post graduate study and worked overseas, apparently here detractors says she is only “Diaspora” and “not really Greek?” Cheap shots against Greek-Somethings abound if you rise above your station in Athens …

Anyone rushing for elections should be aware that Greece is likely to be embroiled in protracted law suits in London courts over the USD 18 Billion of Greek bonds already governed by English law. That could throw a serious delaying spanner in the whole works, unless Greece waives its voluntary offer to those holders and pays the full promised face value on the amount.

Delving further on legislative requirements, about 79 ministerial decrees that need to be passed by Greece, and a majority will have to retrospectively impose a clause into old bond indentures preventing minorities from holding out and extorting so that the swap goes through unencumbered. Don’t be confounded that these clauses are called Collective Action Clauses – or by the acronym CACs.

More than 66% voluntary holder take-up of Greek bonds issued before 2004 and more than 75% for those issued post the Olympic year is necessary for the CACs to be triggered. And no one should underestimate the consequences of legal introducing CACS, and they will precipitate at least two serious problems.

It will be deemed a selective default by rating agencies and so for the ECB to continue to accept Greek securities as collateral for liquidity an EFSF (the temporary EU bailout mechanism) supportive guarantees and security assurances will need to be provided. It’s a tangled web and it may eventually mean the local Bank of Greece print de facto Euros to keep struggling banks afloat. Further, the rating agency pronouncement of a Greek “selective default” will shake investment houses foundations because they will have to dispose of any holdings of Greek securitized assets and debts, including derivatives. Most are forbidden in their mandates from holding asset classed rated as “default” by the ratings oligopoly.

And worse still if these CACS are actually activated and imposed to disenfranchise minorities of blocking rights, the self-regulatory authority the ISDA will also call that a “default.” In that event more than EURO 100 Billion of derivative bond insurance, known as CDS (credit Default Swaps), will trigger a chain reaction across all banking markets. Even “Too Big To Fail” banks across the Atlantic pond will have difficulties since not all the trades can be netted out and cash settlement will add a further squeeze on liquidity and capital requirements. The inter-continental danger here is acute because this will mean a heart attack in the global banking architecture which may choke the supply of life giving real money and credit to very real economies everywhere. Even the BRICs which are the supportive economic underpinning of sagging developed economies.

See how Greece matters very much for the health of the world wide economy and how vital an orderly restructuring is to everyone’s benefit? It’s the old cold war theory of MAD – Mutually Assured Destruction – that has persuaded our “continental allies” and the IMF to contribute solidarity. The Eurozone certainly don’t want a chaotic Athenian Euro exit either because it would damage the integrity of the whole common currency. If they can’t fix Greece, they have no hope with “Too Big To BAIL (not Fail)” Italy and Spain do they?

Therefore, it would seem any shortfall in PSI haircut take up may have to be assisted by Official Sector Involvement (OSI) which means essentially the central banks. The largest holder is the ECB with a nominal portfolio value of EURO 50 billion in Greek debt. It could forego about EURO 12 Billion in profits on its Greek bonds, demanding only the price it paid to purchase them. In that altruistic way it would reduce the debt burden on average Greeks and show some real solidarity and apologize for the feckless hikes in interest rates early in the crisis and punitive interest rates that punished Greece in the first bailout.

Unavoidably, there are still enough tough concessions from Greece. Make no mistake the rest of the world doesn’t want MAD but today in 2012 it is more prepared for the MAD fallout than it was in May of 2010 when the first memorandum was sealed. That is one very serious reason why the current cabinet of the caretaker government approved of this new deal within 16 hours of its announcement, including the austerity and cuts to the bloated bureaucracy.

The bad aspects are that the deal imposes even closer monitoring and verification of the program through an enhanced and permanent presence of the Commission’s Task Force in Greece. That isn’t entirely handing over budget sovereignty, but the Troika’s word will be highly influential. They are adopting the Russian adage of “trust but verify” and it makes sense give our delays in actually imposing structural reforms after passing legislation. Recall also the delays that plague the completely unrealistic EURO 50 Billion privatization program.

But the really ugly side of the conditions is that changes must be eventually made to the Hellenic Constitution to ensure that the state budget gives absolute priority to debt servicing before any other need for say the welfare of citizens or the territorial integrity of the country. And this priority will also be nailed down despite our likely acceptance of demands to creation of an escrow account, ensuring that first our lenders and bond holders get paid and the state must chip in any shortfalls from revenues irrespective if primary surpluses exist or not. While technical details on this requirement are uncertain, it may mean Greece must pre-fund each quarters debt service payments to the tune of about EURO 2 Billion per year for the next 10 years, if PSI take-up is 100%.

In other words, our first national fiscal priority is debt and compound interest repayments.  It is with some certainty that we can conclude that the Troika will have a high level of de facto control of our domestic finances through this escrow account – a conduit to repay lenders first.

The ramification of lack of credibility so that our word is no longer good enough, means we will financially and legally commit to sacrificing anything domestic – pensions, health, education, defense – not only can but will mandatorily be cut so we meet our commitment to our lenders. Such is the price of EURO 233 billion in financing and debt reduction. Unpleasant, but there are no better options on the table since with some outside help, since elites and failed institutions in Hellas have brought us to the brink of the abyss.

An additional regret, and serious ambiguity, includes whether EURO 130 billion will be enough until 2014 for Greece, especially if the local banking sector support needs to be doubled for original forecasts and tops EURO 50 Billion. Given that the ECB already has EURO 127 Billion in Greek collateral from local banks, capital support from European sources and additional liquidity to our local banking system looks likely. It’s not just selfless assistance to Greeks with needs not gifts, but because no one in the Eurozone wants to dig deep into their budget pocket to recapitalize the Frankfurt based central bank for big Greek related losses. It brings to mind the quant Anglo-currency saying of “In for a penny, in for a pound.”

Truth is it will take until about mid-March for the full Greek financing package to be reaffirmed and implemented – and that includes bank recapitalization and the first bailout fund tranche under new loan program. The EU is signaling it is not bound entirely to support Hellas at this critical juncture, but Greece must clearly demonstrate its commitment to transform its economy and public finances.

Greek worker are understandably is aggrieved because a 15% cut in average labor costs has been pledged, so umbrella unions are going to protest again on Wednesday February 22. On the other hand though, 70% of Greeks public wants to remain in the Euro so such draconian and tough sacrifices don’t please voters but don’t defy their overwhelming policy intent.

It is damned if you do but even more damned if you don’t. That is why parliamentary deputies are caught between a rock and hard place and more party splintering could emerge when added omnibus or landmark bills come to parliament. Across the aisle leadership will have to be show by long standing Parliament institutions, including deputy speakers like Grigoris Niotis that are respected by all political colors, so that procedures aren’t interrupted by rage and recriminations. It is seminal to have logical debate and a broad consensus can be reached for the greater good of the country and its worst off. The outside world does watch these votes closely – and the critique is sometimes “Well if the Greeks don’t want to help themselves, why should we sacrifice for them.”

Since no one can guarantee deal delays, rushing into paralyzing national polls may make the situation worse as policy and public administration decision making freezes in March and April even as our debts pile up and our economy sinks further.

In the end, while ballots may allow the two thirds of Greeks that may turn up to vent their disenchantment and the rest to absently curse them, we are all still likely to have the same conservative-socialist coalition ruling the country. And any potential new formation would still be bound (and probably secretly happily so to avoid collapse) by the current “Feb 21” agreement, which finally gives some more flesh to the bones of the “26 October 2011 decisions.”

Perhaps electoral patience post the halcyon days of summer may be a greater reward for the most vulnerable in Greek society – like the homeless, poor and unemployed – given our dire straits. So far we are just surviving and avoiding an Argentinian style calamity. This is no small thing to take for granted, and it has been tough going to obtain this deal – even with its vagueness and imperfections.

Let’s not give the Troika any extra reasons to pull out and break their promises, because as part of the prospective deal they can withdraw from their obligation. The Troika can balk at bailout commitments if the haircut stumbles. Greece also has to absolutely meet every agreed prior action through legislative action at the very least. And then, there is a good chance the whole deal will actually be implemented in March because at the moment it’s a design not a reality.

Only if there are favorable and fortuitous outcomes, then if Hellas will cut its debt-to-GDP ratio to 129% by 2020, but only if the deal is sealed, and we follow through on all the promised structural reforms, fiscal obligations and privatizations. And even then, only if the accrued interest on Greek bonds is restructured and interest rates on bilateral loans from the Troika to Greece are lowered. Anyone that thinks the overnight announcement is the end of the road and its downhill is entirely mistaken.

As the President of the Republic, Karolos Papoulias, who fought in the resistance during WWII and recently sacrificed his entire salary says, it is best not to waste this imperfect last chance to avoid implosion and social disintegration.

Times are tough, so Hellenes here and abroad must mobilize with understanding and realism so we can move prudently  to maximize savings and minimize the downside of social hostility and protracted recession.

Δρ. Νίκος Σκρέκας
Συντάκτης, Οικονομολόγος και Δικηγόρος (εθιμικό δίκαιο).
Ph. D. (Law), M.B.A., Master of Laws, Dip. Applied Finance, Bachelor of Laws (Honors), Bachelor of Economics.

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