Monday 23 January 2012

Waiting for Godot

In Samuel Beckett’s adaptation of Waiting for Godot, Estragon and Vladimir explore the absurdities of life while waiting for a largely fictional character named Godot. “Nothing to be done”, exclaims Estragon, trying to remove his boot. “We’re saved!” they both exclaim, a little bit later in the first act. 

This week, if media reports are to be believed, the Greek PSI will finally be agreed. This adventure in net present value and coupon rate negotiations has reached the final stage of the absurd, to the point where it would almost make little difference to a bewildered public or to an exhausted financial sector whether it occurs or not. It reminds me of nothing more than Waiting for Godot—that illusory moment of salvation which will probably not arrive in this act or the next.

The “Private Sector Involvement” (PSI) is the preferred, more elegant term than the common “haircut”, and refers quite simply to the fact that Greece is no longer able to service her public debt. Rather than repaying 100% of it, will repay (if reports are to be believed), 50% of it or less.  It is interesting to note just how much time was spent in 2010 assuring the world that this was not the case.

This process originally started in May 2011 with an offer for a 21% voluntary PSI, offered by the financial sector. Unfortunately, the 21% apparently referred to net present value, i.e. the present value of the expected future cash flows from Greek bonds, less the present value of the bond itself.

Using NPV to determine a “haircut” in these circumstances is tricky, to say the least, for the simple reason that nominal rather than real bond value prices were used. In other words, the NPV treated a EUR 10 million Greek bond as being worth EUR 10 million, as opposed to its market rate which was probably discounted by at least 50%. This means that financial investors were receiving a 29% “bonus” over actual market rates (more, in fact).

While the “Troika” initially accepted this offer in July 2011, they then reneged in September-October 2011, led by Germany. Germany’s insistence on a greater NPV haircut of about 50% was certainly more in line with market valuation, but in turn led to greater “contagion.” This means that banks and other financial investors refused to purchase bonds of other Eurozone periphery countries (a politer term than PIIGS – Portgual, Italy, Ireland, Greece, Spain), causing their interest rates to skyrocket, and leading to a real scenario of a financial meltdown.

By December 2011, Germany had retracted, stating that the Greek PSI was a “one-time”, unique event, but insisting that the PSI move forward.

Complicating the issue of PSI are three additional factors:

·       The 50%+ PSI must be considered “voluntary” in order to avoid triggering credit default swaps (CDS). This is essentially a form of insurance against a sovereign bond default worked out between market actors. What’s the problem? If a “haircut” is “involuntary” (which is absurd, because the financial sector clearly does not want a write-down), then the CDS clause can be triggered, enabling investors to claim back 100% of their Greek bond values.

·       The fact that a number of hedge funds and other investors have invested in Greek bonds at a discounted rate. The fact that these investors are probably thinly capitalized and understandably aggressive in terms of their negotiating strategy means that they have less to gain from a PSI of over 50%. So they’ve been blocking a deal, if press reports are to believed, on terms offered by Greece (with instruction given by Germany & co).

·       The fact that a PSI of 50% will essentially wipe out the Greek pension and banking system, given that fact that Greek investor hold about EUR 70 billion of Greek government bonds. Oops.

There are in fact several additional complications, but the situation is clearly absurd enough as it is that we don’t need to go any further. I hope.

Godot has very nearly arrived—or perhaps not—in the PSI negotiations. We understand that Greek bonds will be exchanged for new ones with a 30-year maturity and a coupon (an annual interest rate) of 4% or slightly less, on average.

And yet, Greece is not yet saved. The PSI actually has to be financed by who else but … the Troika (enter stage left). Greece will receive further loans of between EUR 130-140 billion to finance not just the PSI but also the recapitalisation of its banking/pension system, part of its annual public sector operations, and a “sweetener” for the private financial sector to accept the PSI deal.

This further loan is in turn contingent on several additional factors, including:

a.     Further Greek austerity measures, including evidence that the Greek political parties back them, and evidence that the current set of austerity measures is working

b.     The agreement of Eurozone national parliaments on the second Greek bailout

c.     An IMF agreement that the Greek debt is sustainable even with a 50% PSI (the IMF has already indicated that a greater PSI is needed)

d.     The ability of the Eurozone countries to actually raise money to do this—which is far from assured given current market conditions.

This entire farcical process is complicated, or undermined, by two additional facts:

·       There is absolutely no success narrative. Press reports circulate an entirely unsubstantiated comment that the PSI will reduce Greek debt:GDP from 160% to 120% in 2020. This is absurd, as it confuses current debt-to-GDP (160%) with 2020 debt-to-GDP (120%), and ignores the many other structural reforms and privatisation issues required.

·       There is no clear public set of calculations where voters, financiers, and others can clearly understand the dynamics of the Greek debt and economic reform programme. This adds to confusion, particularly among a largely hysterical press.  

As with the entire process that started since May 2010 when the first bail-out package was announced, we have allowed the process to dominate the solution, rather than the solution itself. The process is fundamentally flawed, as it involves the total loss of national sovereignty and a contradictory and unworkable first bail-out plan. Beyond this, it is clear that although some useful work has been done, and more is planned, the underlying root causes of the Greek situation have been ignored.

As such, the Troika, the Greek government and the financial sector have allowed a relatively simple process of public debt restructuring to balloon into an existential crisis affecting the world financial system, at least according to the Financial Times, Wall Street Journal, Bloomberg and other worthies.

To say that this is absurd is an understatement. But wait...the doorbell rings. I think Godot has arrived.

© Philip Ammerman, 2012

1 comment:

  1. Nifty. Beckett's work is no adaption though. It's the real deal. An original absurdly true work of genius.
    All good wishes to all the family