Potential Greek Deal

I have come back to find some flesh on the bones of a Greek deal. The bureaucrats plan to finalise things on Monday, but some details have emerged:

  • Money to fund bond redemptions 9-12 months ahead will be put in escrow. If there is not enough, bailout money will be put into the escrow account rather than given to the Greek government.
  • Debt/GDP is expected to reach 129% in 2020.
  • Greece has to take 24 further actions before the end of February to get the bailout, including various actions it had already promised to take.
  • PSI is to be completed a week before the 20th March bond redemption (leaving little wiggle room).
  • Permanent and increased presence of international monitors.

European governments still have to approve the deal, of course, but it strikes me that that is likely to happen. It is not clear whether bondholders who do not participate voluntarily in PSI will be repaid in full. The March bond is trading at around 38, close to its lows, so there is still an opportunity to buy if things start to look up. However, legislation to insert CAC’s into Greece’s bonds will be put before parliament next week, so a coercive restructuring is very much on the table. At this point, not buying this bond looks like a sensible decision.

ECB Deal

It seems the ECB is to swap its Greek bond holdings for new bonds with the same structure, explicitly exempt from any collective action and probably governed by English law. There is no mention of the ECB taking any write off, so it makes most sense to see this as paving the way for a coercive restructuring without ECB involvement. One official quoted by Bloomberg said that the ECB has EUR 50bn nominal of Greek bonds.

The swap applies to bonds purchased under the Securities Market Programme (SMP); bonds purchased by national central banks for their investment portfolios may or may not be covered. Bloomberg reports that they will have to negotiate this individually with the Greek government. This does not make a lot of sense to me, because the ECB does not have a balance sheet of its own: its balance sheet is that of the Eurosystem, which is made up of national central banks. The ECB’s objection to taking losses on Greek bonds is that it would constitute monetary financing of a government deficit, which is prohibited by European treaties; if this is true for the SMP holdings, then it is also for national central banks’ investment holdings.

Argentina Capital Flight Slowed

The rate of capital exit from Argentina has slowed thanks to the government’s capital controls and requirements that international companies repatriate their foreign earnings. Imports of goods now have to receive clearance. Argentina is dependent upon a current-account surplus to bring foreign currency into the country (since it is still shut out of international markets) and thus to finance trade. By preventing foreign currency from leaving the country, Argentina is able to keep the show on the road even as inflation above 20% (calculated unofficially, i.e. correctly) shakes Argentines’ confidence in the peso, and to pay its USD obligations.

It is worth noting that capital outflows were larger in 2008 and a crisis was avoided; what is more, the government is attempting to bring inflation under control. And if global growth is reasonable then that will be positive for Argentine exports and thus for FX inflows. Currency collapse is far from inevitable, but it is necessary to monitor the situation.

Data

  • UK unemployment was flat at 8.4% a.e. Dec.
  • UK Claimant count change increased, d.e., Jan.
  • Eurozone flash GDP -0.3% a.e. Q4.
  • US IP 0% d.e. Jan. Cap Util 78.5% d.e. and fell a little.
  • US building permits 0.68m a.e. Jan. At the high end of the post-crisis range.
  • US housing starts 0.7m b.e. Jan. A new post-crisis high.
  • Initial claims 348k b.e.
  • UK retail sales 0.9% b.e. Jan.
  • US CPI declined to 2.9% d.e. Jan. Core rose to 2.3% a.e.
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