The Financial Times looks a little closer at the deal struck yesterday on Greek debt and funding the euro bailout mechanism, the EFSF. They, too, as I did yesterday, discover that the "devil is in the details:"
The details are critical. Depending on how the programme is set up, bondholders could end up with something significantly less onerous than leaders touted on Thursday morning.
"While this approach has a better structure and bigger haircuts than the terrible July deal, it does not go far enough and may yet be undermined as most details remain to be agreed," said Sony Kapoor, head of Re-Define, the economic consultancy.
The centre of the next, critical phase of negotiations - expected to resume within the coming days - will be over a bond swap programme, which must be completed by January.
Officials said that at its most basic the Greek haircuts will work like this:someone owning a €100 bond will trade it for a bond with a face value of €50. But the real value of the new bonds will be highly dependent on their annual interest rates - or so-called "coupons" - and how long it takes for the €50 to be paid back - known as maturities.
By adjusting coupons and maturities and taking into account other "sweeteners" already agreed by European officals - such as the €30bn ($42bn) in collateral they will provide to back the new bonds - the pain on bondholders could be lessened considerably.
There are other "sweeteners" as well, says frequent AT contributor Steve McCann:
Further the Euro Zone has agreed to make and additional $140 Billion available in new loans to Greece. Not coincidentally the same amount that is being forgiven by the private investors. Any guesses as to how long it will take Greece to spend the additional borrowings? Based on their deficits etc about a year or so.
Now that Greece has, through intimidation, succeeded in reducing its sovereign debt by 50% (or $140 Billion) what is to stop Portugal, Spain or Italy also in the throes of overwhelming debt and credit downgrades from demanding the same? The answer, nothing, the precedent has been set.
There is also less incentive now for these nations to bring their spending and borrowing under control as they can look to this Greek deal as their ultimate fallback position.
Further the European Banks will have to increase their capital requirements (by $150 Billion) to prevent the Greek debt haircut from damaging the banking sector. Many banks, particularly the French are heavily invested in Greek bonds. This new capital normally would have to come from from private sources, however if the banks cannot raise the capital (not likely) then the Euro Zone countries will have step in with the funds. Further draining the EFSF (European Financial Stability Facility).
Lastly, while there is an agreement to have the private bondholders take a 50% reduction, it does not have the force of Law. The IIF (Institute of International Finance), which negotiated on behalf of the banks, stated that the challenge would now be to make certain all private bondholders adhere to the deal.
This is the ultimate exercise not only in kicking the can down the road, but in giving investors sitting on piles of cash an opportunity and excuse to create an artificial bubble in the equity and commodity markets.
It may still fall apart before the meeting of EU finance ministers next month. France, especially, is resisting the bank recapitalization, still insisting the exposure of its big institutional banks to Greek debt won't affect their liquidity or ability to survive. For Sarkozy, this is a point of nationalistic pride and while he appeared to give in grudgingly on the haircut, other aspects of the deal are in danger of collapsing.
Stock markets in Europe and the US took off at the news of a deal. Let's see how long the euphoria lasts.