Thursday, June 2, 2011

Another Greek Bailout? I'll believe it When I See It

This story has the Euro rallying right now:

The Economic and Financial Committee (EFC) of deputy ministers and senior officials of the 17-nation currency zone approved the Greek programme in principle in talks in Vienna that ended after midnight, the source said.
The second programme for Greece, which will effectively supersede the 110 billion euro ($160 billion) bailout agreed in May 2010, will involve some participation of private sector investors but limited to avoid triggering a credit event, the source said.
Details of that involvement, and the apportionment of the additional official international funding, remain to be worked out in time for a June 20 meeting of euro zone finance ministers, the source said.

Those are some pretty big details left to be sorted out.  Considering it's often difficult for the US House and Senate to come to agreement about slightly different versions that pass both houses, getting 17 nations, with sometimes diametrically opposed interests, to agree on details of ANOTHER Greek bailout is going to be tough.  You have some northern European countries that basically don't really care what happens to Greece because their houses are in order.  Others, like Germany, have their houses in order but their banks have lots of exposure to Greek sovereign and bank debt. The trick is with them is that the populace doesn't necessarily care about the banks that much and will likely kick out any government that agrees to bailout a country that has a history of cooking their books (they were only able to join the Euro after all by including prostitution in GDP). Then of course, you have the southern European countries who probably just want Greece to be bailed out once and for all, probably with the least stringent terms possible, as they might be next. 

The biggest issue to deal with is "private sector participation" which is an Orwellian euphemism for saying that bond investors won't get the money they were promised, when they were promised it, i.e. default (they have also tried to use the phrase "reprofiling the debt" but that one didn't stick).  Note the line about how they want to "avoid triggering a credit event".  That is something that would happen in the case of a default, which would a financial crisis as bad or even worse than what happened when Lehman went bust.  Greek sovereign debt and bank debt is in so many places in Europe that a default would eat into their capital ratios and cause loads of unintended consequences (remember when the Lehman bust caused a run on money market funds after one of them "broke the buck" because they were holding Lehman debt?).  Also, according to this article, European banks have been net sellers of Credit Default Swaps (CDS) which are insurance against default.  In other words, they will not only get hit on the bonds they own, but have to pay out on the insurance to the North American investors who bought the CDS'.   Essentially, they need to figure out a way to default without actually defaulting. 

Good luck with that. 

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