So we are still in planning to plan mode. The markets remain calm in spite of the fact that any plan was delayed again, and it is perfectly clear no one in power in the EU had attempted to work out a single detail of any plan until last week. There is so much to say about the events of the past week, but I’m left with 4 questions, where we are being asked to believe something far different from the truth.
EFSF AAA or AA-?
The EU continues to talk about the EFSF as though it is AAA. The original EFSF was AAA because the most it could lose was 440 billion, which was less than the sum of the AAA guarantees. Now that it could lose far more than 440 billion, it is unlikely to be rated AAA, since the WARF of the EFSF after Portugal, Ireland, and Greece “step out” is only AA-. Even if the EU can stop the rating agencies from rating the EFSF, investors will not treat it as a AAA entity, because it isn’t.
IIF Proposing 21% haircut or 100% Mark-up?
The IIF continues to pitch its plan as a 21% haircut, painting the banks as being helpful and part of the solution. The reality is that the weakest banks all have their bonds marked at par in spite of being worth about 40% of par. The exchange will give them a zero coupon bond worth more than 30% of par., and the coupons they will be receiving from Greece have a value of 46% of par using the 9% rate the IIF talks about. So the banks are trying to trade bonds worth less than 40 into something worth almost 80. Even at more realistic discount rates on the Greek flows, the new asset will have a much higher value than existing Greek bonds. Almost comical, is the fact that the IIF now wants to include Greek bonds with maturities longer than 10 years. Greek bonds longer than 13 years all basically trade below the value of the zero coupon bond. This “haircut” is actually a way for banks to exchange their bonds into ones with much more value and pretend they are helping the IMF and EU.
Is the ECB really different from the EU or EFSF?
There is a lot of discussion of what role the ECB should play. Somehow it is made to sound that the ECB is different from the EU or EFSF. It is different if it is willing to “Print” money. If the ECB doesn’t want to print money, and losses on its bond portfolio have to be paid for, it will be done via capital calls from the member states – which or course are the EU members! The ECB money is just as circular as any other form of money in the mix. The ECB gets its capital from the EU members, if it is not willing to print its way out, than the losses would have to be paid for by the same group that is providing the guarantees for the EFSF. The IMF is slightly different, in that it manages to add a bunch of other countries into the mix, though the EU members are also a significant portion of the IMF.
Do banks like or hate government intervention?
Both. They hate it when it is in the form of regulations, scrutiny, or capital increases. They love it when it is in the form of QE or bailouts. So far, having their cake and eating it too. No wonder the “Occupy” movement is spreading.