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On Wednesday, May 26th, 2010 I released “A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina” in which I explicitly outlined the restructuring of Greek debt using the Argentina experience as a template (I suggested that mixture of zero coupon bonds and explicit haircuts would be utilized to re-wrap debt). During that time (and even now), many analysts and government officials said that I was totally unrealistic in expecting a Greek default or explicit restructuring (reference Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!). Well, fast forward about 60 days, and voila, guess what the hell is going on? Zero coupon bonds! Haircuts! Where have we heard this before? Thanks and hat tip to BoomBustBlogger Shaunsnoll, “It’s no secret: Greece is restructuring debt” (via

…consider the cost of sending lawyers and consultants – you could call them spies – to hang around Brussels and Frankfurt to assess the risk of a Greek default.

Yet simply by looking “on internet”, you could find out that Greece has already started to restructure its state debts. Look at the site for the Hellenic Association of Pharmaceutical Companies (, and you will find a link to a joint press release by the Greek Ministry of Health and Social Welfare and the Ministry of Finance. On June 9, unnoticed by most in the financial world, they stated: “The [Greek state hospital system] debts of 2007, 2008, 2009 amounting to €5.36bn [£4.4bn, $6.7bn] will be settled with zero coupon bonds.” The hospital debts lingering from 2007 will be paid with two-year zeros, 2008 with three-year zeros, and 2009 with four-year zeros.

There is some, actually a lot, of detail missing from the one page release, which presumably will be filled in by the legislation that will be introduced, and probably passed, to implement the restructuring. The release does say: “It is certain that the banks co-operating with the suppliers will show interest in prepaying these bonds, transforming the corporate risk undertaken on behalf of their customers – hospital suppliers – in credit risk against the Greek state, in the form of a bond which can be financed through ECB.” And, according to the release: “In case suppliers settle these bonds by January 2, 2011 . . . the above ‘discounts’ corresponds to a total percentage of about 19 per cent.”

Get that? That 19 per cent haircut is based on the Greek state’s own calculation of the present value of these obligations of its hospital system. Others would probably use a higher discount rate. This kind of reduction in principal value, which paid for a critical import, is not, I believe, incorporated in the much touted “stress test” for European banks. The bank regulators and the European Central Bank seem to think any more than a small haircut in euro area state debt would be just too politically sensitive to consider. Yet here is the Greek state telling you their old paper isn’t worth what it was when they incurred the obligation.


Even before the new bonds are issued, some of the hospital debts are already said to be trading around Athens, supposedly at much lower prices than the release suggests would be appropriate.

And while the release says the debts “will be settled”, major suppliers have not yet agreed to the hospital debt bloodletting. According to a London dealer in edgier emerging market paper, some of the suppliers have already been around to get a bid. Unsuccessfully, sad to say, even though the suppliers’ banks have that promise of “ECB” repo availability. He sniffs: “You won’t get a bid at 50 [per cent of face]. My guessing is that it is more like 30. We were appalled at the very low quality of the documentation.”

As you see, we are deep into emerging market frontier-land, even though EU citizens can walk through the fast track at Greek customs and immigration. Before emerging market trade claims would wind up at that London dealer, they would be presented to an even edgier specialist, the sort who is familiar with central African landing strips and Cypriot “spare parts” traders. The one I spoke to a few days ago isn’t interested . . . yet.

This pretty much ridicules the stress tests currently set to be revealed by the EU, which are not even bothering to model a default (or the avoidance of a technical default through restructuring, which is an economic default, nonetheless), as commented on by ZeroHedge:

  1. Latest Rumor Sees 16-17% Greek Bond Haircut, Sending European Stocks Soaring
  2. JP Morgan Pours More Cold Water On Stress Test Credibility, Sees Anything Less Than 25% Haircut On Greek Bonds As A Joke

Well, the damage to the Greek banks, even if partially offset to the ECB is tangible (as stated in How Greece Killed Its Own Banks!) and the probable haircuts that will actual be taken by Greece in the final countdown has been explicitly modeled and stated under several scenarios to my subscribers. For those that don’t subscribe, let me tell you – It ain’t 19%! Let’s look at it from a historical perspective, in “A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina“:

I am quite confident that the thesis behind the Pan-European Sovereign Debt Crisis research is still quite valid and has a very long run ahead of it. Let’s look at one of the main Greek bank shorts that we went bearish on in January:

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nbg since research

Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get…

Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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Subscribers should reference the following as well…

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foreign claims of PIIGS

In order to derive more meaningful conclusions about the risk emanating from the cross border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a Sovereign Contagion model which aims to quantify the amount of risk weighted foreign claims and contingent exposure for major developed countries including major European countries, the US, Japan and Asia major.

I. Summary of the methodology

  • We have followed a bottom-up approach wherein we have first identified the countries / regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), China and closely related countries (Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries.
  • In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors – a) government default b) private sector default c) social unrest. The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.
  • Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.
  • The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

Disclosure: Short NBG

Source: Greece Starts to Restructure in Real Time