Will A European Financial Crisis Be Postponed By A France And German Proposal For A CDO and Off Balance Sheet SPV To Handle Greek Sovereign Debt?

Financial market report for June 29, 2011

The rating agencies have consistently stated that a rollover of Greek debt will constitute a default. Nevertheless banking interest is coalescing behind a France and German led plan for rollover of debt. An inquiring mind asks, is this a scenario for systemic risk? And an inquiring mind asks just who and what is sovereign in Europe? Will an innovative solution arise to place Greek Debt in a CDO and handle it off balance sheet in a SPV?  

Bloomberg reports Greek Rollover Would Probably Rate as Default, Fitch Says in FT. A “voluntary rollover” of Greek bonds, as they mature, into bonds with similar terms would “very likely” be viewed by Fitch Ratings Ltd. as a sovereign default, according to David Riley, Fitch’s group managing director with responsibility for sovereign ratings and international public finance. In a letter to the Financial Times, published today, Riley disputed a statement in a June 24 FT article that Fitch has “signaled” that it wouldn’t downgrade Greek bonds to default in the event of such a rollover, which wouldn’t amount to “a failure to pay coupons or principal.” In fact, the Greek sovereign rating would probably be placed in “restricted default,” Riley wrote. Fitch is “guided by the spirit as well as the letter” of its yardsticks and “if it looks like a default, we will rate it as a default,” Riley said.

Open Europe relates the Eurocrats created moral hazard in granting Greece seigniorage aid: La Tribune, French Economics Professor Florin Aftalion quotes Open Europe’s finding that the ECB currently holds Euro 190bn of Greek debt, while its capital and reserves amount to only €82bn. He argues: “When it agreed to participate in Greece’s temporary bail-out during the spring of 2010, the ECB bowed to political pressure. It made a fatal mistake and seriously betrayed the trust placed in it, while taking excessive risks for which European taxpayers will have to foot the bill.”

Open Europe relates Il Sole 24 Ore reports that the European Commission has threatened to impose new fines on Italy unless the serious problems with waste disposal in Naples are solved quickly. EU Environment Commissioner Janez PotoÄnik is quoted saying, “I hope that the Italian authorities address the problem so that [Italian] taxpayers’ money can be spent on improving the situation rather than on paying fines.”

Zero Hedge reports Greek Debt Rollover – Who Is Getting Rolled Over? The analysis clearly demonstrates that the Troika is put into more risk sooner, and with less control than it would be without the rollover. Greece will be paying a higher coupon over the next 3 years by offering the SPV rates in line with its existing long bonds. The banks get immediate risk relief from a combination of cashing out 20% of their short dated Greek bonds and structuring the SPV to ensure maximum recovery. The banks have also made a proposal that ensures they will be receiving a good rate of interest in spite of the relatively low headline coupon mentioned. It is no wonder why the banks are falling all over themselves to agree to the plan. It sounds like they are being kind, but they are much better off with the plan by shifting near term risk to the Troika and longer term rate risk to Greece.

Yet in today’s news Reuters reports:  “The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies.” and Tyler Durden of Zero Hedge comments: “There it is: expect headlines to slowly start leaking from S&P et al that the MLEC part deux will actually not be an Event of Default, and so Europe has the all clear to continue kicking the can down the road for several more years courtesy of money that is literally created out of thin air, and pledged by that no longer generate virtually any cash flows.assets.”

Mr Durden quotes from Reuters: Politicians and bankers are confident a French proposal for a Greek bailout can be adopted without triggering a default or a payout in credit insurance, lifting a key hurdle to a rollover of Greek debt, sources told Reuters.

Banks have received positive signals from rating agencies that they will not call a French rollover plan for Greek debt a default, three people close to German lenders said on Wednesday.

“The whole charm of the French model is that it was worked out in a such way that it will be fine with the rating agencies,” one of the people said.

Another source said the fact the French model was developed by banks implies the rollover will be fully voluntary — a precondition for rating agencies not to declare a default.

“It is not rocket science for a lawyer to figure out that a debt exchange won’t trigger a credit event,” a derivatives expert with knowledge of the talks said.

“(The French plan) will be seen to comfortably not trigger the CDS,” he added.

However, a senior official at Standard & Poor’s on Monday said it was too soon to judge the ratings impact of the discussed debt relief package. “I can tell you only that we cannot give a judgment on something we have not even seen,” Moritz Kraemer, S&P’s head of European sovereign ratings, had said.

French banks, who have some of the largest holdings of Greek sovereign debt, have proposed voluntarily renewing part of the bonds when they fall due, but on different terms.

That proposal is being discussed in Germany, too, and sources close to the talks said details such as the volume of any rollover and the coupon payments of new bonds need to be finalized.

Joseph Ackerman, whose asset base is 84% of Germany’s GDP, summarized it best: The head of German market leader Deutsche Bank (DBKGn.DE), Josef Ackermann, said on Wednesday the financial industry is prepared to agree to sacrifices because a Greek default would be more dramatic than the crisis at investment bank Lehman in 2008. “The solution for Greece must avoid the collapse of the entire system,” said Ackermann, while pointing out the German proposal for a voluntary rollover of Greek debt would lead to 45 percent writedowns on the bank’s entire portfolio.

And Mr Durden concludes: “There you have it: the global ponzi will now continue, courtesy of the infinitely expandable EFSF and MLEC 2, in the form of one giant CDO and one massive off balance sheet SPV conduit, precisely the two things that led to the cratering of the financial system in the first place.”

Bloomberg reports Trichet Urges New Vision for Europe

I perceive that Sarkozy of France and Merkel of Germany together with LaGarde of the IMF, and Mario Draghi of the ECB, as well as Jean Claude Trichet are rising as sovereigns in Europe to provide seigniorage for Greece as it has lost its debt sovereignty. With the passage of austerity measures, the people of Greece are no long citizens of a sovereign nation state, rather they are residents living in a region of global governance, one of ten called for by the Club of Rome in 1974. As it stands today, a European Sovereign Debt and Banking Crisis is apparently being held in abeyance, but it cannot be abated. Out of the soon coming economic chaos, that is an investment flameout, Götterdämmerung, a Chancellor, The Sovereign, possibly Jean Claude Trichet, and a Banker, possibly Mario Draghi, will rise to power in Europe to impose great austerity, and a new seigniorage that is more political than financial. The word, will and way of these two operating through Framework Agreements will provide European economic governance and austerity for all.

Chart of the European Financials, EUFN, shows a rise to 21.93 during mid-day trading.   

Bonds, and US Treasuries continued lower today.

Chart of TLT

Chart of EDV

Chart of Bonds, BND

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