Interesting article predicting new arrangement between ECB and Greece

Came across an interesting article today in Business Insider from Peter Tchir, “founder of TF Market Advisors, a platform providing macro trading strategies based on insight into the credit markets.” – [IWP Editor]

“Here is my best guess at what will happen with Greece.  In spite of all the rhetoric, Greece will make the May payments.  Whoever is in charge will get calls from Merkel, Lagarde, and Draghi warning them of the global carnage that would ensue if they miss those payments…” [emphasis in original]

So the May debt gets paid.  In return, Greece is allowed to drop some provision about immediate job cuts.  Austerity is out of favor anyways, and it would let the new government safe enough face, on a subject that has become controversial across Europe.”

The first thing that needs to be addressed is the bank recapitalization.  That needs to be done quickly, so that the economy can function better, but it doesn’t need to be done according to the original plan.  Shareholders need to be wiped out.  The banks need to be nationalized, and shareholders and preferred creditors just lose everything.  Depositors need to be fully protected.  I would have bondholders take losses, but since at this point the only bond lenders are probably all domestic, that causes more problems than it solves…”

The other key element of the program will be serious negotiations with the ECB.  For all of their supportive talk, quite frankly the ECB has acted like a jerk in the restructuring of Greece.  After the May payment, the ECB will still own about €50 billion of debt, with the bulk of it maturing in the next 5 years.  Let’s assume that it has an average cost of 85% of par (just a guess, but doesn’t seem to [sic – iwp] far off).  So the ECB’s cost is €42.5 billion.  The ECB will have been paid back at least €10 billion so far on bonds they bought that matured.  Assuming an average price of 90 on those (they were shorter dated), then the ECB has already booked a profit of €1 billion.  On the €60 billion that the ECB held, let’s assume the average coupon 4.5% (possibly a bit low) and that they held for about 18 months on average.  That is about €4 billion of interest that the ECB would have received so far on their Greek bond purchases.  So the “breakeven” for the ECB on their existing bonds only about €37.5 [billion – iwp] (my guess).  The ECB should agree to swap their remaining bonds for about €37.5 billion of the new PSI bonds.  Seriously, it’s not like the ECB is mark to market.  They don’t need a profit and if anyone can live on 2% interest it is an entity that prints money.  This quickly wipes out €12.5 billion of debt for Greece (my guess is the real number using my methodology would be greater).  It also reduces annual interest cost from roughly 4.5% on €50 billion (€2.25 billion) to 2% on €37.5 billion (€0.75 billion).  Annual savings to the country of €1.5 billion – I even know some hedge fund managers who would get out of bed for that sort of money…”

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