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" Would you please stop this texan nonsense?" An Open letter to Mr Spellman.

|Includes: BEP, iShares 20+ Year Treasury Bond ETF (TLT)
Important Notice: this paper is not political. I just trie to correct some blatant  misstatements about the Greek Sovereign drama. This drama has huge consequences for investors, as it is nowadays one of the main risk-risk off light switch!
 
Good morning Mr Spellman,
 
 
Please do not take badly my title about Texan nonsense, I have many customers and friends up there, I just thought it was a good teaser for this mail! And it is true that your state offers the fiercest and most vocal commentators on this subject…
 
I have just read your last letter about Greece and Europe. Link: ‘As Greece Goes, So Goes Europe: How the Unthinkable Happens
 
It seems you have a much better understandings of the economics and politics at stake here than many of your peers, but I felt compelled to send you anyway the last paper I wrote for our institutional customers, regarding this very subject.
 
 
I would first like to point out a few items of your report that I think quite surprising, if you may:
 
 
“If the debt is refinanced over the next four years, when due at the present market cost of funds, a tax bite of more than one-third of ALL Greek income would be required just to pay interest on its government’s debt.”

The price of Greeks bonds on secondary markets is totally irrelevant.
What you must take into account for your calculations is the interest rates that public creditors today charge to Greece when they fill the gap that private savers left wide open.
 
The last published rate was 4.2% for a 7.5 years loan maturity for the UE part. Link : ‘Eurozone leaders lower Greek bailout interest rate, extend maturity
And 3% for the IMF part. Link WSJ: Who's on the Hook for the IMF's Greek Bailout?
And the last auction of 3 and 6 months Greek Tbills, the 10th of Mai, were printed at 4.06% and 4.88% respectively. Link WSJ: Greek's T-Bill Auction Overcomes Default Fears .
 
I do not want to imply that these rates would still be available without official pan European support. If ever the latter was to disappear, Greece would default, and go bankrupt, obviously. And I do not want to say that Greece will succeed in eventually averting default even with these lower rates, if they cannot generate any meaningful revenues in the years to come.
But if, as you did, one tries to calculate what will be the cost of debt for Greece, relative to income, I suppose one should first of all use actual rates, and not ones from secondary markets quotes, that have nothing to do with current Greek way and cost of borrowing ?
 
 
“Seeing this possibility, in the last year many banks have sold their Greek debt to the ECB, which was willing to pay the full face amount as part of their Rich Uncle support role. To the extent the ECB cleared the Greek debt from commercial bank balance sheets, …”
 
Is this really the narrative which is making the rounds in Texas?
 
The ECB did not buy Greek debt from commercial banks at ‘full face amount’. NEVER! It purchased it on the secondary market, at very depressed markets prices, on average, depending on maturities, at between 80% and 60% of par. These prices are even lower now, since it stopped its purchases and since Me Merkel insisted so much on private sector involvement in the support plan’s costs.
 
And it therefore obviously DID NOT  ‘clear(ed) the Greek debt from commercial bank balance sheets’!
The whole ECB Securities Market Program (NYSE:SMP) amounts today to 75 B €, and the ECB bought also other peripheral countries bonds.
Knowing that the total outstanding amount of Greeks bonds is nearer to 270 B €, you understand how your statement about ‘clearing bank balance sheets’ is misleading…
Once again, I do not want to stress this point because I do not agree with you about the consequences of a Greek default on the European banking system, on the contrary. But all these factual errors will just confuse any reader who tries to make his own ideas about the current European upheavals.
 
I will gladly add you to the diffusion list of my Thaler’s Corner, hoping that it will help you think about us poor European with accurate data.
 
 
Best Regards.
Erwan Mahé.
 
PS: please be kind to my English writing, I am a French native.


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Disclosure : Long 20 years OAT and 30 years BTP Zero Coupons, EDF Corp 5 Years 4.5%, Grece 1 Y and 8 Y bonds, Thaler's Corner.