So as I kept one eye on the weather and another eye on news events last week the most interesting thing that arose was the Eurozone ministers closing in on a Greek debt buyback deal. I’m sure much has been made of it in the press and it is a necessary step on the road to recovery for Greece, but it is the first step on a long and winding road.
Current Greek DEBT TO GDP ratio stands at around 190% so nearly 2 euros debt for every 1 euro earned in basic terms, obviously this cannot go on and doesn’t take into account the interest required on this debt. The aim of the debt buyback is to retire a significant portion of that debt to create some breathing room and a path to getting that debt to GDP ratio closer to 125% by 2020 which by the way is still not a great situation to be in!
This is debt forgiveness or restructuring depending on how you want to look at it. Some may view it as very unpalatable for a couple of reasons, A- Greece have effectively shorted their own debt and are now buying it back for a steep discount i.e they took out loans for $100 and only paying back approx $35. B- depending on your view of hedge funds there will be plenty of distressed debt funds out there who probably are going to do very well out of this as Greece will be paying out circa 10bln euros for debt instruments which plenty of these funds would have been picking up over the last year or so for something closer to less than 20 cents in the euro more likely to be somewhere in the range of say 14-18 cents depending on market circumstances at the time. In periods of panic and deleveraging this is what happens and things are effectively sold a fire-sale prices. So a lot of these guys will be made good at close to 100% of their investment.
It is not as easy as that as a price has yet to be set and will more than likely vary across the curve ( or duration ) and it will go through a book build process whereby the Greek government or more likely the IMF. TROIKA and EU will probably pore through the list of investors willing to sell their bonds in this process and perhaps weed out the “bond vigilantes” or fast money types and give priority to more important holders but that is just my opinion and not set in stone.
I appreciate this is distasteful to many but in my mind its very necessary to get an economy back moving again and unfortunately one man’s problems is another man’s opportunity. The same would and is happening in the mortgage markets around the troubled nations and is already been witnessed in Ireland and to a lesser extent already occurring in Spain but momentum will probably pick up there middle of next year would be my guess.
The alternative for these bond holders is to do nothing and hold out till maturity and try and recoup their full investment or go down some very long and winding legal routes that may or may not be successful and more than likely very costly. One fund recently resorted to commanding ownership of an Argentinian navy vessel almost as a ransom for debt payments owed to them from Argentina’s last default from way back in 2001. http://www.newstatesman.com/blogs/economics/2012/10/us-hedge-fund-seizes-argentine-naval-ship
The exact details of this debt buyback are still to be ironed out and the small matter of where Greece is to get the 10bln necessary to do it, is likely to come from bailout funds but still needs clarity and will be a tough sell to Germans but overall a step in the right direction I feel, but like I say it is a long and winding road for Greece as a target of 125% debt to GDP ratio by 2020 still leaves them in the doghouse.
Otherwise markets have been strong during most of last week with SPX recovering from its post election sell off and now trading north of 1400. Obviously still a lot of back of forth on the fiscal cliff issue which seems to be reaching a sticking point around tax increases but I still believe they will get over the line and enact a plan, they cant make the situation go away overnight all that is needed is a solid plan that corporate america will buy into and give them confidence to look forward and start investing for growth. In a world of low interest rates and low returns from developed bond markets, equities and commodities have the potential for best returns if this happens. Hopefully 2013 will prove to be the year a line was drawn under the problems of the previous four and the global economy learns from previous mistakes and a more controlled and responsible form of growth is kick-started. Fingers crossed…..