In spite of the excited chatter in the market, the European finance ministers now have to return to their home countries to get approval to make the next round of dispersals to Greece. While it is likely that this will get done, it may not be clear sailing. Opposition members will certainly take this as an opportunity to challenge the leaders of their countries. Not every citizen is happy with sending more money to Greece, and as the “official sector” loans get riskier, that dissatisfaction will increase. Look for some countries to seriously question the deal and even threaten refusing to make the payments. In the end it is likely to get done, but the market is too complacent right now about some of the headlines we will see on future disbursements.
Then there is the proposal for the European Financial Stability Facility and the European Stability Mechanism—the rescue operations for the euro zone’s credit crisis—to lend Greece money to buy back old bonds. These bonds currently trade around 30% of face value. The big question is, how many investors will sell these bonds at these prices? Many holders are hedge funds who are likely prepared to fight. These bonds are documented under English law, giving the holders more legal rights than before the restructuring in March when these bonds were easily manipulated by the government since they all fell under Greek law. These hedge funds will look at the recent ruling in Argentina where the government has been ordered to pay holdouts and take further comfort in trying to get paid more. Even the banks and insurance companies that hold these bonds have a cost basis around these prices. They were told in March that the private sector restructuring would be a one-time deal. They are not likely to sell here as they will feel betrayed. Without a successful buyback, the Greek debt burden remains as unsustainable as it was yesterday.
Finally, there is lots of talk about extending maturities, reducing coupons, reducing fees, and even paying back some profits, which is all contingent on other things happening. It is a bit like buying clothes two sizes smaller because your New Year’s resolution is to eat better and go to the gym five times a week (not just to use the steam room). In theory the new clothes will fit, but it might be premature to buy them. A lot can happen that will ensure that these “sweeteners” never kick in.
It appears to me that once again, more time has been spent crafting a press release that can be sold to the markets, than crafting a feasible plan for Greece, which is not encouraging sign for Spanish hopes of a generous bailout package.
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