Greece's debt profile looks very difficult to finance: Greek Government Bonds (total amount outstanding 212 b, total Greek debt is EURO 350 b) maturing 2011 and 2012 amount to Euro 35 b, plus coupon payments of Euro app. 10 b p.a.. The following charts show the gravity of the problem:
Total GGB Debt (Principal only): EURO 212 b
Average Coupon: 4.47% p.a.
Average Yearly coupon payments: EURO 10.8 b
Min Coupon: 2.3%
Max Coupon: 6.5%
Theses numbers exclude the roll-over of debt, which is unlikely to be financed at 4.47%.
With the currently heavily inverted Yield / Spread Curve (short end +30%, mid term +20%) we believe that real spreads are in the 10% range (at best).
While the question of a solution (aka restructuring, reprofiling, extension of terms) is no longer a taboo, the markets, policy makers and Greeks seem to be at odds.
We see the following three scenarios (with probabilities):
a. no short term solution, short term fixes (50%).
b. extension of terms (Vienna Plan) (25%)
c. Proper Restructuring (with or without prior default). (25%)
While details are not available, we believe that the current French initiative falls between the the 2nd and 3rd group. While option a. is preferable in the short term, we believe that within 2-4 years we will see a proper restructuring with a 50% (or more) haircut and 20-30 year maturities, low coupons and potentially collateral ("Brady Plan"). We believe that the sequence of events follows the classic 1980s LATAM format (short term fixes, followed by extension of terms and new money, followed by a Brady Plan).
The irony is that while most LATAM countries have retired their bonds, Greece et al will lead to a revival of this (exciting) bond market.
28 June 2011
P.S. Between 1990 and 2000 I was actively involved in the pre-Brady and Brady bond market in both LATAM, Asian, African and CEE restructurings, having analysed, restructured, traded, swapped and invested these bonds.
Calendar / Time Line (source: IlliquidX.com)
- Greek parliament to vote on implementing the austerity measure totalling €78bn
- If the Greek austerity plan is approved, the IMF Executive Board will meet to approve their portion of the 5th loan tranche to be disbursed. For markets to avoid a technical default, Greece must receive €12bn in EU and IMF loans by 15th July so all formal decisions to will have to be taken by around 8th July
- Approval of a second bailout of €170bn (to cover the 2012-2014 period), including leftovers from the first rescue, privatisation and voluntary rollovers. More specifically, it is expected to be filled with €45bn of loans, €57bn in unspent aid from the 2010 bailout, €30bn in asset sale proceeds, and €30bn from creditors.
- The Eurozone Finance Ministers meet again to finalise details of how to involve private sector bondholders in voluntary rollover
- Default deadline: without an agreement on a second bailout that will trigger the €12bn plan, Athens will run out of money and will also be the first Eurozone country to experience sovereign default
- About €4bn of Greek debt will mature, and €3.3bn of coupon must be paid. Greece has a total of €18bn to be repaid by the end of August
- EU bank stress tests expected
- Greece must pay €6.6bn of maturing bonds