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Eau De Toilette

My French is not particularly good, but I've never understood why toilet water is so expensive. That still remains a mystery to me, but of more importance is trying to figure out the how and why of the proposed French bank voluntary rollover plan.                                                                                                                                                  Details seem sketchy but here is my understanding so far, and my thoughts on what it really means.                                                                                                                                          For every 100 million Eur of Greek bonds that French banks have with maturities less than 5 years, 70 million will be rolled over into something that sounds a lot like a Brady bond. The first key here is to remember than 30 million will remain with the original maturity. So far I have not seen whether French banks have discretion or not which of their 5 year and in bonds they rollover. Is it 70% of each issue, or just 70% of their total holdings? If it is of their total holdings, will some banks be tempted to keep 30 million of their shortest maturities rather than the ones closer to 5 years? Depending on what maturity they keep, the immediate debt relief to Greece may not be that significant. They cynical side of me (most of me) thinks the banks would retain the shortest dated debt with expectations that tranches of IMF money would be available to repay them, but maybe the banks are really being altruistic here.                                                                                               The flows on the 70 million that they turn into Brady Bonds has its own sets of problems - more for Greece than the banks. Greece will have to redeem 70 million. Then banks will then lend back Greece 50 million of 30 year money. The other 20 million will buy some form of assets - to guarantee principal and possibly some level on income from a highly rated entity. I figure a 30 year French Govt zero would cost somewhere around 30% of face (based on the relationship between U.S. treasury strips and the long bond, and the relationship between U.S. and French government rates). So to principal protect a 70 million exposure, it would cost 21 million by my guess - which seems very much in line with the 20 million they are keeping.                                                                                                   Before we get too distracted with the principle protection element, we need to ask where Greece gets the other 20 million? Assuming Greece currently needs all the money it can get - a pretty safe assumption - this rollover involves Greece paying the French banks 70 million per 100 million, but only getting back 50 million. So Greece would need to come up with 20 million today to 'help' the banks 'help' them. Where is that money going to come from? The IMF and EU? While my assumption that the banks are trying to get taxpayer led entities to take them out of the debt that isn't rolled over might be too cynical, this part is obvious. At the end of the day, French banks that used to have 100 million of Greek exposure, will now only have 80 million. That other 20 million is coming from somewhere. Maybe that is why the credit markets aren't jumping up and down with joy this morning.                                                                                                       I have not seen anything on what interest rate the brady bonds would pay. If the income has to come from the Greek portion, then it will either be extremely low for a 30 year bond if Greece is getting a deal, or will be at least as onerous on Greece as what they are currently paying. As fun as it is to point out that Greek 2 year debt yields 25% or more, or that the 5 year Greek bonds yield 19%, that is not the coupon that Greece is currently paying. On a quick glance at the outstanding Greek debt, my guess is their average coupon is around 4.5%. If Greece only pays 4.5% on their portion of this long bond, the banks would only get 3.2%   (4.5% * 50/70). That is fairly low. Regardless of what the principal is rated, some investors may become uncomfortable funding a bank short term, that owns very long term assets with low income. That impact would be minimal on the big banks like BNP, but could provide a whiff of contagion for any small French banks with too much exposure. If the coupon that Greece has to pay is significantly more than 4.5%, why would they want this? Like so many other suggestions during this crisis, no one seems to be figuring out if Greece would want or should want this deal.                                                                                                     The headlines sound intriguing but the details leave a lot to be desired, and if anything, leave a lot of room for the banks to transfer potential losing positions back to the taxpayers.                                                                                                                                I'm surprised the market isn't stronger based on China's claims that it will continue to support PIIGS debt.                                                                                                                                 In any case with PIIGS bond yields higher today, SOVX wider, MAIN leaking again I remain bearish on stocks and u.s. credit today. We are sitting right on top of the 200 DMA for SPX. We have bounced around that support a few times. Friday looked ugly though into the close, and we were possibly only saved by the weekend bell from breaking through that. I think it is more likely that we break through it today and create some fear amongst all the recent 'technicians' who played this support level. I like being short stocks, though have some short in high yield as that market seems less likely to experience a big relief rally than stocks.                                                                                                                                   It should be another fun week.