Sunday, June 3, 2012

Greek Debt Goes All In

When playing Poker, a player faced with a current bet amount that they have insufficient remaining stake to call but wish to call, can bet the remainder of their stack and declare themselves “all in”. This, to a large extent, is what Greece plans to do as it is set to offer a 10-year note of as much as €5BN ($6.8BN). “It is high stakes they’re playing with” was how Jim Reid, credit strategist for Deutsche Bank in London, described their move.

If the sale goes well, it could help to calm bond markets across Europe which have spent a good part of 4Q09 and YTD 1Q10 dealing with the ramifications of the PIIGS precarious predicament. If the buyers balk, European Union leaders will be in the unenviable position of deciding whether a bailout of Greece in necessary. “Bringing a bond deal will crystallize the situation,” Jim Reid went on to say.

One of the issues with the new issue is that the last Hellenic hawk this past January, while over subscribed by three times the number of bidders usually seen for such a sovereign sale, induced an increase of €3BN in issue size and a 0.25% reduction in yield, but seems to have saturated the market. What looked like a success shortly after the sale became somewhat less when bids for the bond were 3.5% lower within days, “which for a government bond investor is a horror” according to Philip Gisdakis, a UniCredit analyst.

In their new role as “chief closer of the barn door after the horses are gone”, Standard & Poor’s last week added insult to injury by cutting the ratings on $17BN of Greek asset backed and mortgage backed securities issued in eleven separate deals from AAA to AA. In the process the U.S. rating agency also lowered the grade of Public Power Corp. S.A.’s (PUPOF.PK) debt from BBB- to BB+. PPC, Greece’s biggest power company, is publicly traded but also majority owned by the Greek government. S&P’s logic here is that given its own problems, the nation would be less likely to provide emergency financial backing should need be.

Not to be left out Moody’s Investor Service said it will review 23 structured finance and covered-bond deals with a face value of $28BN for possible downgrade.

Now, lest you think that the rest of world is fiddling as Athens burns, the problem that could be the real problem is that in its efforts to figure out just how big Greece’s liability is for the currency swaps it has executed but kept off of its balance sheet, Eurostat, the statistical office of the European Union, has brought to the fore the unfunded liabilities attached to health and retirement costs of many major western European nations and the U.S.

According to Eurostat if all unfunded liabilities were consolidated on to national accounts they would amount to 9 times GDP for Greece, 5 for Portugal and the good ‘ol U.S of A. and 4.5 for the U.K.

The IMF recently warned that from 2015 on, population aging will pressure deficits and debt even as the ratio of public debt to GDP expands beyond 110%. Given the need to fund these liabilities, Barclays Capital forecasts long-term bond yields of 10% by 2020 in the U.S. and U.K. based on one of their demographic models.

CDS spreads for Greece closed on Friday at 350bps continuing to recede from the 428bp peak reached on 2/4/2010. The 350bp mark was first touched on January 20th of this year. For perspective, it should be noted that during the height of the credit crisis sovereign CDS levels for Greece never exceeded 292bps which was the level hit on 1/20/2009.

Portuguese sovereign CDS levels peaked at 244bps on 2/8 but have since come down to 160bps as of Friday. The credit crisis peak for Portugal was 163bps on 2/17/2009 so they are now back through those levels.

The U.K.’s CDS closed at 87bps on Friday; off of a near term high of 101bps on 2/4 but even the recent peak was well below the 175bps level seen on 2/17/2009.

Uncle Sam’s CDS, saw a recent spike 63bps on 2/8 but like the U.K.’s this interim high was still well below the 100bp level seen in February of last year.

All good stuff for a Monday morning.

Enjoy the week.

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