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Greece Will Default To Be Rescued

The EU leaders have decided (pact) to rescue Greece:

  • 109 billion euro will be paid to Greece, at about 3.5%, through the EFSF.
  • The maturity will be extended from 7.5 yrs to a minimum of 15 yrs and max of 30 yrs.
  • Private sector banks and funds will participate and chip in 37 billion euro. Another 12.5 billion euro comes from debt buybacks, taking the private sector bill to 50 billion euro.
  • If this is termed a default, there will be “credit enhancement” provided so that such rolled over loans and bonds will continue to be useful as collateral for overnight liquidity.
  • Europe is likely to make the US Rating agencies (Fitch, S&P, Moodys) irrelevant – thank goodness – but will replace them with something equally shady or worse.
  • This is funny: All euro member states, other than the troubled ones, will get deficits under 3% by 2013.

This is likely to be called a default. First, at 3.5% versus the 30 odd percent currently being the market rate for 2 year bonds, or even 20% for 10 years, the banks are likely not doing this on their own. Secondly, the stretching of maturities, in any banking system, is considered a problem.

Bloomberg says the EFSF will buy debt across the stressed euro nations. They expect a 90% participation rate from current bondholders.

Guardian: Trichet, President of the ECB has said that Greek banks will be recapitalized to the tune of 20 bn Euro .

The markets should rejoice first because a decision has been reached. They will react individually to how bad or good others think the decision is. This is a business where impressions impact business, being a highly leveraged one. So wait and watch. There are lots of useful and interesting trades that will come.

Note that effectively there is more money out there. Some of it will come our way.

  • shailender bisht says:

    Hi Deepak,
    As we talk about these bailout and reaction in bond/stock market ,another market ( gold and silver) waits anxiously ( or so as per commodity traders) to take a direction.
    It would be good to have your views on the precious metals market.

  • Vikas says:

    I think as a general rule, the equity market should go opposite of the gold market. Both cannot follow in the same direction. I think.

  • gordong says:

    At last, the ECB showed that it is possible to make bondholders pay . This opens the door to something so big that in the end the bankers will cry as does the middle class they screwed in the past.