The Wall Street Journal: Greece Is About to Get Hosed

By Mark Gongloff

After this week’s political drama in Greece has faded, the EU and private investors still must come up with a way of rolling over Greek debt without triggering a default. And it increasingly looks like the plan being hammered out for that purpose will be bad for Greece.

In a nutshell, the idea is that banks and insurance companies owning Greek debt will be able to trade half of the Greek bonds they own maturing in three years or less for new 30-year Greek bonds, allowing Greece to delay its day of reckoning.

Most analysts agree that debtholders will likely only trade in their longer-dated stuff, which is cheaper in the market, trading at 55 cents on the euro, for which they’ll be made whole. Boom, instant profit. They’ll keep a lot of the short-term debt, knowing it will be covered by the bailout brigade and is so trading at roughly par.

Stephen Fidler, Laura Stevens and Ulrike Dauer write in this morning’s paper that, while great for the debtholders, it’s not such a great idea for Greece:

Apart from paying interest on its own bonds under the first option, Greece would in effect have to pay the economic costs of financing the 20% invested in zero-coupon bonds, adding to its debt-servicing costs. According to analysts’ calculations, assuming a 2% annual growth rate for Greece over 30 years, the annual cost of funds to Athens would be 10%, double that on the maturing debt.

Analysts said the structure would likely be viewed as a default by at least one credit-rating firm and wouldn’t bring down a debt burden that many economists argue is unsustainable.

Carl Weinberg of High Frequency Economics in a note yesterday asked why Greece doesn’t just cut out the middle man:

The question is why the Greeks would ever go for such a proposal. Outside advisors might suggest that the Greek Treasury is better off by far buying back these same bonds from the market at 55 centimes per euro and then financing those purchases with the sale of new 30-year bonds to the market directly. To recoup the same soon-to-mature bonds, they would only have to spend 55% of the face value bought back instead of the 100% they would pay to do the same thing under the French plan.

Peter Tchir at TF Market Advisors wrote in this morning with a similar note:

Working through the details as best possible shows it strengthens the positions of the banks and weakens the IMF/EU/ECB (“Troika”) and is expensive for Greece.  The consequences of the rollover plan are that:

·         The Troika has to provide more money up-front without being able to enforce austerity compliance

·         The Troika is more likely to continue to fund Greece longer than it would otherwise because of the additional up-front payment and the moral suasion the banks will use to encourage further use of public funds

·         Greek interest payments will go up, and with the GDP kicker, will be almost 2.5 times what they are currently scheduled to be and are in line with existing Greek long bond yields

This all follows on what Tracy Alloway wrote yesterday at FT Alphaville, in an exploration of notes by Barclays Capital and Unicredit:

The only problem is that by avoiding the dreaded “D” rating, the French proposal doesn’t actually seem to do much for Greece other than stretch out its liabilities for another 30 years.

Source : http://blogs.wsj.com/marketbeat/2011/06/29/greece-is-about-to-get-hosed/