7th March 2012
Yesterday was a day where we saw substantial equity market falls for the first time in a while and the first time in 2012 so far. The US Dow Jones Industrial Average fell by 203 points for example and the link with today's theme is that at least some of the fall was blamed on the situation in Greece. It also allows me to point out the recovery in equity markets which has taken place in recent times. In spite of yesterday's fall 2011 ended with the Dow Jones Industrial Average at 12217 so it is still up considerably and in fact until yesterday we were at levels not seen since early 2008.
Since then we have had some news on the economics front which is that Australia's economic growth in the fourth quarter of 2011 was only 0.4% which was half the rate of the previous quarter. So her quarterly economic growth as measured by Gross Domestic Product figures has gone 1.4%, 0.8% and now 0.4% giving us a trend which is clear and sadly rather familiar. Indeed half of the growth was caused by an increase in government spending adding further gloom to the numbers.
In many ways her enormous commodity resources have allowed Australia to have a relatively smooth ride through the credit crunch era but two problems may be coming home to roost. Firstly an over-valued exchange-rate which is a consequence of the resources strength and a house market boom which has ended and may yet turn to bust.
Greece and her debt restructuring
Where do we stand?
The offer is as follows from the Greek Ministry of Finance
"an invitation to private sector holders of certain Greek bonds to exchange their holdings of existing Greek bonds for new bonds to be issued by the Hellenic Republic having a face amount equal to 31.5% of the face amount of the debt exchanged and notes of the European Financial Stability Facility maturing within 24 months having a face amount equal to 15% of the face amount of the debt exchanged, each to be delivered by the Hellenic Republic at settlement. Each participating holder will also receive detachable GDP-linked securities of the Hellenic Republic with a notional amount equal to the face amount of the new bonds of the Hellenic Republic issued to that participating holder."
So there you have it 46.5% of your money back in total with an additional option or hope that you might also benefit from the GDP-linked securities. However eyes will also have turned to this bit.
"the (Hellenic) Republic has positive GDP growth in real terms in excess of specified targets."
Positive GDP growth looks a long way away right now although over the period such a deal is intended to last much may (and hopefully will…) change.
For those wondering why net present value losses are estimated at 70% or so as opposed to the 53.5% implied above this is because future interest-payments are lower too.
"2.0% per annum to payment date in 2015
3.0% per annum to payment date in 2021
4.3% per annum thereafter"
We immediately see that the deal is not as clear cut as many would have you believe. For example the mathematics of the deal is calculated on the basis that Greece can raise the coupon payments to 3% in 2015 (and 4.3% in 2021). What if she continues on her downward trajectory and cannot? In addition the GDP-linked securities are complicated and raise their own uncertainty.
Also the coupon on the new bonds will bear no relation at all to the likely yield on the new bonds which says it all in many ways. Even 4.3% is nowhere near the possible 19/20% yield on new Greek bonds (h/t Pawelmorski).
I am reminded that the same group of people who turned down a 21% debt reduction last autumn are supposed to accept a much higher reduction now! Mind you by its latest output Greece's government may be thinking the same.
"The Republic's representative noted that Greece's economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI (Private Sector Involvement)."
They decided to lob in a threat as well, although some may consider it a long-hoped for promise!
"if PSI is not successfully completed, the official sector will not finance Greece's economic programme and Greece will need to restructure its debt (including guaranteed bonds governed by Greek law) on different terms."
What is the deadline?
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