Attention: Giannis Dragasakis, Yanis Varoufakis, Euclid Tsakalotos
We have long been critics of the severe conditions imposed by the Troika on Greece.
In our view, loans should only be made on terms that are affordable by the borrower or not at all. Thus, we have been suggesting, since 2011, that all the loans to Greece should be swapped by the holders in exchange for 20-year Zero-Coupon Bonds at a 50% discount to face value – equivalent to approximately 3% per annum compound interest.
This would remove the heavy burden on cash flow of Capital and Interest payments over a significantly long period to assist Greece with its financial repairment programme. We believe that it is totally absurd for the EU to insist on terms that they know are not deliverable. As an aside, we wonder why Germany insists on “the rules must be kept” when their debt to GDP is 80% as against the Maastricht Treaty 60%!
I attach one of our articles on this subject.
I wish you all well for the future prosperity of Greece and successful negotiations with the Troika.
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.
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.