Thursday, January 26, 2012

DIP Financing - ECB & Greece

This is almost unbelievable but it is apparently true.  The ECB (and the IMF it has to be said) have decided (BTW this is a long held position) that their exposure to Greece is worth 100 cents on the Euro!  In effect the ECB takes the view that they provided new money (not always) and that their loans to Greece cannot be redeemed for less than parity.  It gets even better, all the bonds that the ECB bought from the market should also get 100 cents on the Euro!

Now the concept of Dip (Debtor in possession) financing is clear, after a bankruptcy new money gets preferential treatment in the waterfall of repayment.  Of course, the problem here is that non one in Europe wants to contemplate a Greek bankruptcy.  

The "funny" bit is that now the ECB wants to make a profit on the bonds it bought in the market, because if they are redeemed at par, since the ECB bought them at a discount (yield of 7% vs coupon of 3%) they would make a gain on their bonds.  In fact, this is exactly what the commercial lenders wanted to expose, they offered a coupon of 4% on new instrument "if the Supranational participated".  BTW 18 months ago, the 20% Greek har cut was supposed to reduce that countries Debt/GDP to 80%, the 70% haircut today -- will generate a figure of 120%, because Greeks GDP has been contracting at a rate of nearly 10% p.a. for the past two years...

Who believes that Greece can manage debt to GDP of 120% going forward?  Realistically, the Greek government will eventually wake up (or be defeated in elections) and will reneg on this ridiculous deal.  Certainly Greece was stupid in borrowing so much (but the lenders were stupid too), now "real men" have to make a serious decisions:  Greece needs to go its own way (however painful) and tell Europe to shove it!  The current path will lead to unimaginable pain for decades, and will lead to further negotiations.  I can bet serious money that soon some German politician will suggest that "Greece could sell the Greek islands -- for cash".  

Unbelievable, simply unbelievable


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