The Euro Greek Bond Rescue: 21% Default, 21% haircut, 100% bank bailout
A default by any other name would smell as rank.
My first thoughts on last night's Greek Bond swap Euro rescue packages are, as you might expect, not positive. It would seem to me that time has been bought until the autumn and no more.
And, make no mistake, this is another massive bank bailout by taxpayers.
The scheme? There will be three bond exchange plans and one rollover plan through which the existing bondholders will take their 'haircuts'.
Some existing Greek bonds will firstly 'flip' like magic into new 30 year bonds, paying 4% now, rising to 5.5% by 2021.
The rest will later on flip into 15 and 30 year bonds paying about 6.3%, but with an immediate 20% loss on the value of the main bond. 90% of investors are expected to participate.
Greece's debt would mature on average to 11 years at these much more manageable interest rates. The Eurozone and IMF will stick in €106billion to make this happen, the bondholders will take a hit of about €37 billion.
Once each swap occurs a default (just a selective default!) will very likely be declared by the ratings agencies.
This is now accepted pretty much by everyone. That, in itself, has unpredictable and ongoing consequences. Some swap defaults may be declared worse than others as they arise.
This is not a bailout of Greece: this is a bailout of banks and insurance companies by taxpayers - mainly French and German taxpayers of French and German banks.
But also, through the IMF's participation, by UK taxpayers.
The state has again agreed to stand behind the assets of banks across Europe and, probably, the UK.
If after today, however, the Spaniards and the Italians are still paying about 6% or more on their own sovereign debt and that remains so for the summer, then last night will have been irrelevant.
We'll all be back to square one in late September and whatever the mechanism used last night will have been a paper exercise and no more.
And the same mechanism that they tried last night would not work on Spanish and Italian debt held across Europe and the UK - it's just too big.
If what was effectively done last night was the first issue of a new financial instrument - the Tempeurobond, if you will - then the can has definitely been kicked down the road and no more.
That new EuroBond will effectively simply be a temporary Bond swap - Greek for Eurobond.
But not so fast, Mr. EuroBond! If the problems in Spain and Italy actually fatally destabilise the Euro then you might as well have kept your Greek bond or even your drachmas.
Last night amounted to little beyond a bunch of politicians talking up the value of the Euro and talking up the value of debt issued by the Greek, the Irish, the Portuguese, the Spanish and the Italians.
The toxicity of Greek Sovereign debt only matters beyond Greece because banks across Europe (including the UK) hold that Greek debt paper in their vaults. That paper debt is on the balance sheet of the bank.
That paper has worth, or is worthless, or people are just not sure one way or the other (the worst position). It has a risk percentage attached to it and is measured against rock-solid assets - that determines the bank's core tier 1 capital ratio: how the solid assets measure up against the assets that are 'risk-based'.
The lower the percentage of the ratio, the less confidence people have in your bank, and vice versa - so goes the theory.
If things are so bad that your, say, Greek debt might be 97% risk-rated or it might be 10% risk-rated, we just don't know - it is worse than having dodgy debt with a clear 50% risk-rating.
Because if no-one really knows, then also ultimately they don't know what your Core Tier 1 capital is.
That means other banks and bankers and investors lose confidence in you. That's how the last bank collapses (and indeed all bank collapses) happened.
So if that Greek debt is given a much more fixed value, even at a loss, and effectively re-issued by the IMF, the EMF (as Sarkozy has dubbed it), the ECB and the French and German taxpayer, then at least a specific value can be attached to it.
That is the attempt behind last night. To create short-term confidence (i.e. over the summer) in the assets held by the banks, not really the Greek economy.
I say again - this is a bank bailout by taxpayers.
This is state capitalism as bold and as brassy as anything the Chinese state does to manipulate its currency. It has nothing to do with free markets or the fundamentals determining the price of an asset in a market.
This is a bunch of politicians not facing up to the dealers and the speculators, but agreeing with them instead, that we'll just wait for a bit more and see if something turns up over the summer.
Remember this time last year when Sarkozy and Merkel threatened to tame the markets and the speculators?
Two key tests for me. How exactly will the ratings agencies react? And will UK banks participate in the new bailout of the banks?
If the ratings agencies declare a default occurred last night (the dreaded credit event) then will the Greek paper issued in the place of the old defaulted Greek debt (whatever it's called) be allowed to be considered as genuine? - or will they effectively still call it old Greek debt repackaged and downgrade it for investment purposes?
In which case, our pension funds, insurance companies and banks might, after all, have problems holding it or declaring it as sound. If the banks have to apply the same % risk to it as before, then it won't help their Core Tier 1 capital and they will have lost the haircut on the debt too.
Secondly, will Barclays and HSBC in the UK either want, or will be allowed to participate in the bailout? Will the state-owned UK banks participate?
As I pointed out in my last blog, according to last week's stress tests data, the Greek sovereign debt held at April 30th this year by the UK banks was as follows: Lloyds has €151million, RBS/NatWest has €1.1billion, Barclays has €192 million and HSBC has €1.3billion. Will they keep it? Or will they participate in the bailout? Will the mechanism allow the UK banks to?
HSBC and Barclays insist they weren't bailed out last time and did not rely on direct state help.
Will they now? Will they take a haircut in return for certainty? If they do, these assets will have been bailed out. Or will they write their Greek debt off? I suspect not.
If the EFSF package has to work over the coming months to do the same for Spanish and Italian debt, will HSBC and Barclays participate?
Again, as I reported in my last blog, HSBC has €9.9billion in Italian sovereign debt, Barclays has €9.37billion.
These banks, if they are not to fail, will have to have a state bailout one way or another if their Italian assets go the same way as Greece's. Almost literally, a crossing of the Rubicon.
The politicians say this is just for Greece - a one-time only offer. We'll see.
It doesn't matter whether you say a bank's core tier 1 capital ratio should be 20%, 10% or 1% to avoid collapse. If someone doesn't believe you actually know what your assets actually are worth one way or another - in banking terms, you are dead.
Unless we get real and get to the heart of the problem here - that the European and the UK banking system is broken then European and UK banking is dead.
The more the state bails out banks like it did last night, the more 'The State' across Europe actually becomes the banking system itself.
And in that case we might as well embrace it and become the next breed of new State Capitalists.