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The Greek crisis : the Danaides’ barrel ?

Back on the Greek saga or the largest bankruptcy in the 21st century without credit event trigger (to date). The succession of bailout plans shows that we do not simply resolve the insolvency of a country by emergency devices

Article also available in : English EN | français FR

PROLOGUE : It never stops to save Greece

The Danaides’ barrel - Remember the Greek legend. The Danaides were the fifty daughters of King Danaos. The king summoned the fifty nephews who explained to him their desire to marry his daughters. Danaos accepted. For their weddings, he offered his daughters a dagger and made them promise to kill their husbands at night. All did, except Hypermnestra, who spared Lynceus. Later, Danaos organized games to marry his 49 girls . But Lynceus killed the 49 girls in revenge for his brothers. To hell, the Danaides were given a punishment that was to fill ever a drilled barrel of water


In May 2010, the EU and the IMF give Greece a total of 110 billion Euros spread over three years and originally repayable over a period of five and a half years. Of course this support is conditional on the establishment of a restrictive fiscal policy and the implementation of structural reforms to create conditions for greater competitiveness

Moreover, the payments are made in installments, and each now gives rise to intense pressure on the Greek government. Thus gathered in Brussels for the 23/10 and 26/10 summits, the finance ministers of the countries in the euro area finally allowed the release of the sixth tranche of the loan for Greece - a total 8 billion Euros - This package is financed by Europe to the tune of 2 / 3, or 5.8 billion euros, the balance to be for the IMF that should agree in the coming days. This payment originally scheduled for early October should again postpone Greece default of payment.

Euro zone bailout plans: origin and utilization

Back on bailout plans granted to countries in the Euro zone encountering severe fiscal deficits since May 2010. How are tens of billions Euros raised, what are they for, and mainly, are those amounts enough to re-establish the public finances and stabilize those countries (...)

Anyway, the idea of these bailouts is to extend in time the liquidity constraint and the wall of debt as with the plan of 85 billion Euros for Ireland in November 2010 (except that Ireland have, at the cost of drastic austerity, succeeded in eliminating the deficit and therefore a part of the growth of its debt); as also with the plan of 78 billion Euros in Portugal in May 2011.

In any case, we will quickly understand (even if the policies say the opposite ) that the Greek debt is unsustainable and that the plans try to resolve the insolvency of the country by saving time by liquidity support and the restructuration of the assistance granted. Indeed, financial conditions initially set at 3-month Euribor + 300 bp on maturities below 3 years and 3-month Euribor + 400 basis points on maturities beyond three years will be revised downward in March 2011 with a margin reduced by 100bp and the maturities will be extended


At the Eurogroup summit of 21 July 2011, it was decided to reduce the volume of the Greek debt (about 350 billion Euros) by introducing a second bailout plan involving this time private creditors.

Greece rescue - Behind the scenes

Debt rescheduling, monetary policies questioning and EFSF bond purchases in the secondary market. These are the key steps of a plan that should not significantly affect banks’ net income but rather spread economic losses over (...)

We will see that with the third act that is preparing, private creditors will be more involved, which means in other words they will agree to write-off more significant Greek papers held in their balance sheets. All this will sound like the beginning of the end of moral hazard with the idea of finally empower investors instead of just requesting the public finances of the states of the area and therefore their taxpayers.

In any case these so-called voluntary contributions were estimated at nearly € 50 billion and then add to the 109 billion Euros regarding the second bailout plan 109 billion Euros according to the classic formula (2 / 3 European Stability Fund financial and a third for the IMF successive tranches) by buying largely time: minimum maturity of 15 years and up to 30 years

In bailout plan of July 21, it was also planned purchases of Greek debt on the secondary market by the EFSF. It was thought at the time that this alternative was very unlikely to materialize in practice for two reasons. On the one hand, Greek securities holders who are not mark to market or at least those whose changes in positions value do not impact the income statement under IFRS (ranking in the banking book) have no real incentive to outsource direct capital losses; on the other hand, those mark to market or even those whose changes in value of positions directly impact the income statement still under IFRS (ranking in trading book) are advised to wait for the supposed purchase of the EFSF driving up the prices of their bonds. Clearly, there is no potential for transactions on this type of solution.


This act is played these days. So we call him plan 2 twice since it implies that private creditors should accept a depreciation of about 60% of their claims (instead of 21% in July 2011). This means a contribution of banks that would move from 50 Billion Euros to about 142 billion Euros. It must be assumed, other things being equal, that banks should be recapitalized by the equivalent of that amount if they want to keep intact their solvency ratios as these impairments are added to the institutions cost of risk and reduce the net income and therefore capital. About the terms of recapitalization (private, public, reformed EFSF), it is another issue that promises tense debates, excessive volatility in banking stocks and the credit spreads of banking bonds. We will have the opportunity to talk about all this

For now, it is still amazing that one can "realize" that in three months the repayment capacity of the Greek state has been reduced from 92 billion Euros

Do not worry, it is only 40% for private creditors to lose on the face value of the Greek debt held (at least those with maturity of 2020to and concerned by this so-called voluntary contributions plan contributions), which corresponds to the destruction of 96 billion additional capital

The calculations are simple

  • On 07.21.2011, the discount of 21% on Greek positions held corresponds to assets impairment of 50 billion Euros to private creditors.
  • Today, the revaluation of the discount to 60% should correspond to impairments of 142 billion Euros, 90 billion more.
  • So a discount of 100% (or a total failure) would amount to 238 billion Euros of write downs, or 96 billion in additional losses

Let’s stay calm, it seems that what happens to Greece cannot be characterized as a credit event (probably because it would be politically incorrect and especially financially costly for Greek CDS sellers unable to pay those who are insured against default of the official Greek state)

It will be recalled that according to ISDA, one can identify four scenarios that can trigger a credit event: repudiation and debt moratorium (the most radical solution taken by Russia in 1998) Restructuring / rescheduling (Argentina 2001); bankruptcy (for the corporate and banking such as Enron 2001, Worldcom 2002, Northern Rock in 2007, Lehman 2008 because a country is not bankrupt but default) default with inability to pay on time

One can certainly understand the potential systemic risk that would occur if the Greek debt restructuring is announced as a credit event. But we also expect a confidence even stronger vis-à-vis finance if those who bought insurances against an adverse event cannot exercise them when it occurs. It should no longer be for the public to come to the rescue of those who have invested on Greek debt (moral hazard) but rather to help players who have hedged against a Greek default (since some Greek debt CDS sellers will not be able to assume the insurer obligations)

In any case, if one looks back in the past by focusing on the last two major sovereign defaults, namely Russia in 1998 and Argentina in 2001, it is clear that the Greek situation or what that may happen is not very distant from those past situations. The only difference between Greece 2011 (beyond the fact that this country belongs to a currency area) and these defaults 10 years ago is that we live in an more unstable economic system.

- more sophistication and complexity of financial instruments with ever increasing financial innovations

- Globalization and interactions between actors with more risks of potential systemic crisis.

- pro-cyclical accounting and prudential standards, that is to say, they can increase the periods of depression or encourage bubbles. This creates the risk of permanent solvency crisis for all actors (businesses, households, states ..) when the bubbles burst and of overvalued financial assets prices fluctuate violently

All this naturally makes more complicated the resolution of crises through policy initiatives, be they large

Mory Doré October 2011

Article also available in : English EN | français FR



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