Wednesday, 29 June 2011

French Letter

here is the French proposal; ftalphaville link to french proposal

I think the mechanics in the flow chart are not too clear, here's my take on what happens;

Investor redeeming €100 of Greek bonds;
1) gets €30 cash
2) gets 30yrs on €5.5*0.7 + 0-2.5*0.7 risky coupon from Greece
3) gets a zero coupon bond, ZCB, worth ~ €30*0.7 today that will pay €70 in 30yrs time, that is guaranteed by the EU

Greece has to;
1) pay €30 to the investor
2) issue a ZCB to the EU for €70
3) pay coupons for the next 30yrs of €3.85 plus max(min(2.5,gdpRate), 0)*0.7

the EU
1) gets a zcb from greece
2) issues a zcb which gets held by the ecb

The euro value for the investor redeeming their bonds is thus approximately €78.

This is CLEARLY a restructuring. One can understand why a bank might accept it though, in part because of the dishonesty in the proposal.

  • Listed on an EU regulated market, but with restricted trading in the New GGBpg until 1st January 2022[1].

[1]    Trading and transferability restrictions do not apply to ECB financing transactions
This is trying to create a false market in these securities. By not allowing them to be traded they hope to make sure that banks will be able to carry on pretending that these bonds are worth this fictional amount. If I did that as a private investor, I would be sued for fraud, and rightly so.

I can accept that banks would accept this restructuring, because a 78% recovery rate on Greece is very high in my humble opinion. What nobody should accept is the idea that we can pay out such a high recovery rate from taxpayer funds, increase the taxpayer credit exposure, and be complicit in trying to create a false price for Greek debt.

When is the German public going to realize how much money they are giving to Greece?


  1. I'm surprised no private investors have tried suing Mr Applegarth, Sir Fred etc for deceit to be honest.

    I'd have given it a crack if I was within the small claims limit and had lost out.