Schäuble Sends Mail

We're not sure if the markets have interpreted the noises surrounding the Greek bailout correctly. In fact, one can not really be sure of anything, since the personae dramatis keep changing their tune. The one party whose opinion is probably the most important is Germany. We note in this context that the German minister of finance, Wolfgang Schäuble, has sent a letter to the ECB, the arm of the eurocracy most strenuously opposed to a Greek debt restructuring. It appears as though Schäuble now insists that Greece's creditors must be prepared to take some losses.


As the German newspaper 'Die Welt' reports:


“Bundesfinanzminister Wolfgang Schäuble steuert auf eine harte Auseinandersetzung mit der Europäischen Zentralbank (EZB) zu. In einem Brief an EZB-Präsident Jean-Claude Trichet, den Internationalen Währungsfonds (IWF) und seine Kollegen in der Eurozone fordert Schäuble eine Beteiligung der privaten Banken an den Kosten für die Rettung Griechenlands und damit der gesamten Eurozone.   Jede neue Vereinbarung über weitere Griechenlandfhilfen am 20. Juni müsse ein klares Mandat enthalten, mit dem Griechenland möglicherweise gemeinsam mit dem IWF, einen Verhandlungsprozess mit Athens Gläubigern starten könne, heißt es in dem Schreiben, das "Welt Online“ vorliegt. Jeder zusätzliche Unterstützung für Griechenland muss eine faire Lastenteilung zwischen Steuerzahlern und privaten Investoren enthalten, damit das Land in der Lage sei, seine Schulden dauerhaft zu tragen. Im gleichen Schreiben weist Schäuble eindringlich auf die Gefahr hin, sollte es für Griechenland kein neuerliches Rettungspaket geben: „Eine Rückkehr der Griechen an den Kapitalmarkt im Jahr 2012, wie im laufenden Programm geplant, scheint mehr als unrealistisch“, so der Minister. Das aber bedeute, dass das Volumen des jetzigen Programms nicht ausreiche, Athens finanzielle Bedürfnisse zu decken. Schäuble erwartet daher eine „substanzielle“ Ausweitung der Hilfe durch Europa – auch, damit der IWF aus den Hilfsprogrammen nicht aussteigt.

Ohne eine neuerliche Auszahlung von Geldern vor Mitte Juli gebe es die „reale Gefahr des ersten ungeordneten Staatsbankrotts in der Eurozone“, warnt Schäuble eindringlich.”


“Federal minister of finance Wolfgang Schäuble is cruising toward a tough confrontation with the ECB. In a letter to ECB president JC Trichet, the IMF and his colleagues in the euro area, Schäuble demands that the private banks share the costs of a rescue of Greece and with it, of the entire euro area.  Any new agreement on fresh aid to Greece on June 20 must contain a clear mandate regarding Greece beginning a negotiation process with its creditors, possibly with the help of the IMF,  the letter, which has been made available to the 'Welt', says. Any additional help for Greece must consist of a fair burden sharing between tax payers and private investors, in order to enable the country to bear its debts on a sustained basis. In the same letter Schäuble points emphatically to the danger should there not be another rescue package for Greece: “A return of Greece to the capital markets in 2012, as envisaged in the current program, appears more than unrealistic”, so the minister. That however clearly meant that the size of the current program was insufficient to cover Athen's financial requirements. Schäuble thus expects a “substantial” expansion in the help granted by Europe – which will also be needed to avert the IMF abandoning the rescue program. Without a renewed disbursement of funds prior to mid July, there would be a “real danger of experiencing the first disorderly national bankruptcy in the euro area”, Schäuble emphatically warns.”


In short, it becomes ever more evident that Greece's creditors can no longer hope to escape having to mark some of their exposure to market. This is what this is ultimately about, as the market prices of Greek debt securities have already declined by 50% and more – but both the ECB and the commercial banks still treat such securities accounting-wise as though their redemption at par were assured. It is thus interesting that Trichet's previous insistence of refusing to countenance even the possibility of a Greek debt restructuring has softened in recent days. Thus we read at Bloomberg:


“European Central Bank President Jean – Claude Trichet signalled for the first time he may support encouraging investors to buy new Greek bonds to replace maturing securities as officials seek to stem the nation’s debt crisis.

While Trichet said he’s against imposing losses on creditors, he indicated he’d approve of financial institutions maintaining their level of outstanding credit. “That is not a default,” he said at an event in Montreal late yesterday. “That is something the ECB would consider appropriate.”

ECB policy makers have opposed any measure that could be classed as a default to avoid what European Union Economic and Monetary Affairs Commissioner Olli Rehn described yesterday as a “Lehman Brothers catastrophe.” The ECB is considering a rollover of bonds as an alternative means of easing Greece’s funding squeeze, two officials familiar with the matter said last week, on condition of anonymity.”


Well, here we are – the Greek default is on its way. What one must consider here is that it is not up to the ECB or Olli Rehn to define what a default consists of. That definition is a job of the credit rating agencies, which have in the meantime already made their position on the matter clear.

As Reuters reports on the stance of  Moody's  – which is following in the footsteps of Fitch, which has  issued a roughly similar statement:


“European officials are striving to arrange a private sector rollover as a key part of a new rescue plan for Greece, to help justify to their taxpayers the burden of fresh financial aid for the struggling euro zone member.

Bart Oosterveld, head of the sovereign risk group at Moody's Investors Service, said the ratings agency could classify a debt rollover as a default if it believed that bondholders had only taken part because they feared the consequences of not participating.

"It's hard to imagine in the current circumstances that people would voluntarily do this," he told reporters in Paris.

"Our default definition contemplates that for something to be voluntary it has to be truly voluntary … More likely than not this would be a credit event in our view."

Oosterveld, who is based in New York, said there was a big difference between Greece's current situation and 2009's Vienna Initiative for eastern Europe, when international banks agreed to keep credit lines open to subsidiaries in Romania, Latvia, Hungary and Serbia.

"The thing about Greece is that it is so late in the game," Oosterveld said, noting there was now a clear risk of a Greek default looming over investors, unlike when the Vienna Initiative was agreed. "It's hard to imagine anyone doing anything voluntarily right now."


One must keep in mind here, any agreement Greece reaches with its private sector creditors involves concessions on their part. They will have to agree to either be paid less, or get their payments later than originally envisaged. No matter the details, it will be an agreement that is detrimental to the creditors. Moody's argues that such a detriment may not constitute a credit event in the strict sense if lenders voluntarily amend the terms of a loan contract in order to buy a borrower some time. Clearly though, the Greek situation does not represent such a scheme – after all, the process is directed by the political and bureaucratic classes of the euro area, who will impose whatever course they think is appropriate on Greece's creditors.  As Schäuble notes in his letter, it will be either that, or a 'disorderly national bankruptcy'. Clearly then any agreement reached with creditors will not be voluntary.

Conclusion: a Greek default is very likely on its way. The financial markets are nervous, but they may actually underestimate the gravity of this developing situation. Rather incongruously, market participants have lately piled back into the euro. We believe the euro is a clear 'sell' at recent levels. As flawed as the US dollar is, it is not to be shunned in favor of the euro at this particular juncture.

We would also point out that Greece's stock market and specifically its bank stocks, have only managed a brief unenthusiastic bounce following rumors that an agreement regarding continuation of the Greek rescue package was near.



The Athens General Index – an unenthusiastic, corrective looking bounce – click for higher resolution.



The NYSE listed ADR of National Bank of Greece – after a brief short covering bounce it is once again sinking toward its previously established multi-year low – click for higher resolution.



It is of course unknowable how the markets will react should it become evident that a 'credit event' is indeed in store. So far we merely have Schäuble's letter, which does not  constitute an official decision. However, given the ECB's apparent willingness to countenance the idea of some sort of debt extension agreement with Greece's private creditors (which consist in the main of various euro area banks – mainly in France – plus a number of Swiss banks and the ECB itself), it appears to us that the long awaited Greek default is finally going to happen. It is equally clear that the rating agencies will then rate Greece's government debt as being in default. That the financial markets have fully discounted this prospect seems rather unlikely. The recent weakness in global stock markets seems mostly predicated on a sudden slowdown in economic activity, especially in the US. The Greek debt problem has been relegated to the back pages – but it has not disappeared.


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One Response to “Greek Default Within Hailing Distance”

  • Amazing times we live in. Walks like a turkey, gobbles like one and they are calling it a duck. Lets see how well it swims?

    There are going to be long term implications to this mess. For one, by the time all this stuff is done, there will be a lot less interest in loaning any government all they can stand to borrow. The gravy train for the banks will have left the station.

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