The Greek "deal" farce

So, when is the next meeting to announce the final, final, final, really really final Greek problem solution?

Because what they announced last night, not only falls far short of the mark, it is nothing short of a bad joke.

But let's start at the beginning:

I won't go into too much detail here, all this stuff is pasted all over the internet and covered by the financial media today but essentially that "deal" includes three elements:
1. extending maturities and dropping the coupon on existing EU loans to Greece
2. returning the SMP profits to Greece, and
3. a debt buyback by Greece (exactly where the money will come from and HOW will this be done is not quite clear at this point)

The "deal" gives the go ahead for the €34.4bn bailout installment by Dec.13 (still needs to be ratified by some governments), with a further €9.3bn in three tranches the first three months of 2013. It also cuts Greece's debt by €40bn or 20pc of GDP, and forecasts a debt to GDP ratio of 175pc in 2016 and 124pc in 2020.

You can find the announced "deal" details here: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/133857.pdf

Let's look at those elements one by one:

1. Interest payments on Greece's first bailout (which bailout are we up to now?) are being reduced by 100bps which in essence now means that some countries are funding Greece at a loss, something I'm sure that some politicians will just neglect to tell their own constituents. Loans to Greece as a result of the second bailout will have their maturities extended by 15 years (from 10 to 25yrs) and have interest payments deferred by 10yrs. This helps Greece short term to the tune of about €13bn but it hardly scratches the surface for the country to achieve debt sustainability.

2. The ECB will return to the Greek government PROFITS (yes, you heard right PROFITS) from interest earned on GGBs held by the ECB which the ECB bought through the SMP. This is estimated at around €9bn euro handout to Greece. Now some inquiring minds reading this may ask, how can the ECB have profits on GGBs when they have devalued in price? The ECB through the SMP started buying GGBs in the spring of 2010 and stopped in the summer of 2011. Those bonds are now worth about a 1/3 (current average price is 28) of what the ECB bought them for, so how can you possibly have a profit?

The answer lies in the fictitious paper world that central bankers live in. After all when you can conjure money out of thin air, regardless of what happens next, everything must look like profit. The answer simply lies in accrual accounting. They buy sovereign bonds, they don't market them to market, and accrue the interest. The accrued interest is reported as PROFIT. Everything looks good on the balance sheet until one day these assets need to be sold, and then you have a REAL loss (as in the case of GGBs) and not fictitious accounting profits. The real assessment of profit or loss should only come from the difference between the buy and sell price, plus an interest payments received, minus the truncation costs. The GGBs were bought by the ECB at prices far exceeding the current market value and it's unclear how much interest Greece has actually paid on those already (Greek bonds pay interest annually), so where exactly is this profit that will be returned to Greece coming from? (HINT: they'll print it). It's nothing more than more sleight of hand by the ECB while no one in MSM calls them out on it. Who needs to worry about REAL losses when you can hide this stuff on your balance sheet for ever and when you can print money and call it profit.

3. Details are not clear here as to where the money for the buyback will come from, or whether it would take place in the form of a fixed price offer or a competitive reverse auction. The latter approach has an inherent degree of unfairness about it in the sense that domestic bond holders will be forced, eeeer sorry, I meant encouraged to participate at a LOWER tender price than foreign investors in order to achieve the average price (35 cents) required. This makes this approach unlikely but nothing about the Greek government surprises me anymore so I wouldn't totally rule it out. The problem with the likely approach, the fixed price approach, and although the EU has capped the buyback prices at last Friday's close, they are closing the gate after the horse has already left the barn. Since the information about the "deal" including a bond buyback was in the works was leaked, vulture hedge funds were front-running the action thus erasing most of its effectiveness. What happened here is that we have seen an average GGB strip price appreciation of 75pc since August. This essentially means that the average market value of the €63bn of Greek debt (the outstanding debt post PSI) in private hands which at market prices was about €10bn would now need instead over €30bn to retire. It all amounts to big fat profits to the vulture funds coming out of the pockets of the Greek people (new issues will be collateralized using proceeds from the sale of public property). It is a process that is simply subsidizing hedge funds blatantly and shamelessly. Moreover, since €20bn of that buyback will come from Greek banks, they will have to be recapitalized to the tune of €15bn which will have to come from FURTHER EU loans to Greece. Can anyone else see the death spiral here, or it just me?

It's all about optics. It's all about a paper exercise to reach an arbitrary debt to GDP ratio and deceive everyone into believing that Greece has been solved and it can continue to pile debt upon debt and maintain debt sustainability and a functioning economy. It's all nonsense. especially when you consider that part of cooking the numbers here as part of this "deal" also includes fudging the denominator of the debt ratio, the GDP number. Can anyone seriously believe that Greece's economy will escape its downward destructive velocity (about 40pc GDP decline since the crisis started) and actually show 4.5pc growth in 2014 and beyond? That's less than the growth that the IMF itself is forecasting for an industrial behemoth like Korea, or an emerging Brazil, or resource rich Canada and Australia. It's all numbers on a piece of paper to hopefully get Merkel through the German elections a year from now until the REAL solution is imposed on Greece. Exit for the eurozone, because even an OSI haircut will only kick the can down the road until Greece finds itself in the same position again. The Germans know that as well as anyone.

Mr Samaras, the Greek Prime Minister, proudly proclaimed today "A new day begins for all Greeks". What he forgot to explain to the Greek people is whether this is a good or a bad day. They will find out for themselves in pretty short order I'm afraid.