The article below, concerning Greek debt and possible default was written and published on the www.avenews.org.uk website in 2011 by two outstanding financial engineers – Graham Reid & Max Wheel. Clearly there is bad blood between the EU (Merkel) and the ECB’s controversial QE plans posted last Thursday.


So, as we await the fall-out from the Greek election and the possibility of ‘GREXIT’ the advice proffered in this article still stands up to fairly close scrutiny. Assuming that Syriza of the ‘left’ lands the spoils, though ‘austerity’ begins with an ‘A’ I doubt the new government will be able to spell it, nor will they much care about ‘default’, despite expressing no desire to leave the EU. So I suspect equity and bond markets may be very volatile early next week.



If you have time, please read the article and then the comments made by the authors at the end. You may think that the beginning of the article is marginally out of context, but pick it up from ‘GREECE IS INSOLVENT’ and it will all make great sense! The Troikas (ECB, EU and IMF) could do worse than adopt this plan as part of its negotiations with Greece!





Haircut; “short back & sides” or “comb-over”?


By Graham Reid & JR Max Wheel


October 28 2011


I’m afraid it’s a bad comb-over with all the bald patches shining through for those who dare to look.


The plus side of the Brussels Grand Plan is that it has a faint possibility of fooling enough people to defer the problem for a month or two at best. The negative is that it fails dismally to address the root cause of the problem and provide a lasting solution, not even one for Greece. In fact, albeit that we are still left without any detail, their statements lead us to believe that they have made matters worse.


For example;


Who will now trust a CDS contract on peripheral Europe Sovereign debt?

If it is this easy to halve your debt (just say you can’t pay!) who trusts the value of Italian, Spanish, Portuguese or Irish bonds? Maybe markets will drive these down to levels whereby they can’t pay the interest.


Does anyone believe that the proposed level of capital raising by the banks will be enough to cover the write-downs on Sovereign debt to realistic levels and increase capital ratio to 9%?


We make no apology for repeating what we have been saying for the last 2 years, namely:


Greece is insolvent


The main purpose is to “rescue” the shareholders of mainly French and German banks, not Greece


Greece will never recover if they are forced to accept these high rates of loan interest, short term repayment and severe austerity programmes – their situation can only worsen month by month


The Euro was a political fudge from outset with no economic sense


The Eurozone countries have no financial commonality that can ever support a single currency unless the entire block is centrally governed and that is politically unacceptable to its peoples.


Whilst Germany, Holland and some others have benefited hugely from the Euro, Club Med has suffered by comparison, partly due to its inability to match efficiency and performance


The necessity for so many meetings and the fudged “solution” (sic) is a direct result of upcoming elections in France & Germany where Sarkozy/Merkel are fighting for their political skins rather than saving the Euro or Greece


So, where should they go from here?


If they are serious about keeping Greece afloat long enough to decide the fate of the Euro and its membership, they have to take steps to convince the market that their solution will work and that it will provide a sensible template for any other country in difficulty.


It appears that banks have already been forced to accept a 50% haircut but why on earth use that acceptance to worsen Greece’s problems and throw good money, and lots of it, down the drain. Let’s be honest and admit that Greece cannot pay the interest on the loans without being given/lent the required sum by the IMF – what a waste of precious cash resources. Obviously it also has no hope whatsoever of repaying the capital in the timespan without yet more loans and no real effort has been made on post 2015 projections anyway – what does that tell us!


Once these facts are acknowledged, what should they do? Give Greece a chance albeit with a necessary level of internal re-adjustment to bring the budget deficit back to zero in a reasonable amount of time. We suggest swapping all current Government bonds for new 20 year zero coupon bonds at a 50% discount. This means exchanging a Euro100m existing bond for a Euro 200m new 20 year zero – this is 3.5% imputed interest BUT Greece would not have to pay it for 20 years. It would be better still if the IMF either guaranteed these new bonds or issued them itself on Greece’s behalf.


With careful budgeting, and regulation from the IMF, Greece would have up to 20 years to recover giving both the market confidence that a real solution had been constructed and the Greek people the ambition to make it succeed rather than, justifyingly taking to the streets to complain against the appalling treatment meted out to them – yes they have been profligate; yes they fail to pay taxes; yes they should never have joined in the first place, but the rest of the Eurozone should be ashamed at its failure to challenge its admittance and total failure to monitor their finances and rein them in or indeed to accept that there was a deliberate fudge of the figures, that was known and admitted by Romano Prodi last night.


This solution has the added advantage of the bank balance sheets being significantly improved. At the moment, they have to value Euro 100m of Greek debt at Euro 50m maximum (in truth probably 35m would be more realistic). Under this scheme, they could value the new Zeros at Euros 100m. So, less money to raise to meet the 9% target. We fear that many banks will use this 9% ratio to shrink their balance sheet by reducing loans and driving their economies nearer to recession. It will also give time for reflection on the future of the Euro – more of that from us in another article!

We say to the ill-named “leaders” of Europe, you have a chance, before your meeting in Cannes, to come to your senses, admit the truth about Greece and take these steps to calm markets and provide hope for the citizens of Greece. Step up to the plate, give leadership and honesty for once and do the decent thing before it is too late.


Accept that the Greeks took advantage of the opportunities that were dangled in front of them by the EU after the EU had fudged all the figures to have them admitted to the club.

Greece was bust BUT French and German Banks (+others) had taken advantage of the higher interest rate they got on Greek Euro bonds and were then squealing about the losses.


The so-called “solution” for Greece was a solution for the French and German Banks NOT Greece.

OUR SOLUTION would have helped both Greece and the French/German Banks – it was :

Swap the Greek Sovereign Debt in those Banks (which should have been valued at zero in their Balance Sheets) for 20-year Zero coupon Bonds – each Euros 100 million swapped for 200 million payable in 20 years (or earlier if both agreed) – this is approx 3% compound interest payable on maturity.


Then – Greece is relieved of interest payments for 20 years giving them the opportunity to get their economy moving and also allows the other Euro Banks to value their Bonds at par – great news for B/S and Capital requirements. Best if the Zeros were IMF/World Bank issued.


If you look at the current situation, Greece is now in “primary” surplus – positive excluding debt interest – so our solution would have made the situation very promising. 


It could still be done and would be a great way to use the Euros trillion being printed!


If the ‘new’ Syriza led-Greek coalition government wishes to stay in the EU, I suggest that the TROIKAS (EU, ECB & IMF) take a look at this possible and plausible solution to the debt issues.


It is utterly ridiculous/stupid/self-defeating to create an even larger problem by lending funds to an indebted borrower at rates of interest that they could never hope to pay. Hence our concept of Zero coupon bonds at a “reasonable” rate to give them time to recover and the lenders a reason to be able to value the debt at a higher figure than should otherwise be possible.


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