Financial, Real Estate, Stock Markets Trends and Current Affairs

Summary: Hey Mr. & Mrs. investment committee members, here's a strong investment idea. Let's take 30% of our money off of the table after losing 48% of it already, and reinvest 70% of it back into the original investment pool, but this time accept 20% in equity risk just as the country we're investing in is about to undergo a nasty, self-imposed austerity driven recession while our new fixed income position is subordinated in real time by the IMF, and soon likely to trade underwater just about as quickly. Now, where's my damn bonus??? I have an appointment with the Azimut dealer!

As outlined in explicit detail last week in the post The Anatomy of a Serial European Banking Collapse, French banks (and by extension, France itself) risk outright financial collapse if the Greek situtation progresses in its current direction. Of course, armed with said knowledge, there is no surprise that the French are the first to blink. From CNBC: Sarkozy Confirms Greek Debt Deal With French Banks:

French banks, among the most exposed to the Greek debt crisis, have reached an outline agreement to roll over holdings of maturing Greek bonds, part of a wider European plan to avoid sovereign default.

Immediately after French President Nicolas Sarkozy announced the breakthrough, German bankers voiced their interest in the "French model."

Of course they are, because right after the French, the Germans are next in line for the capital gutting experience of this generation as a result of binging on profligate debt. As a matter of fact, the German banks will most likely be very open to the ideas that Ireland may be floating right about now - and Ireland's goverment will probably push a harder bargani than Greece's.

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The news came as international bankers met euro zone policymakers in Rome to discuss how the private sector can share the burden of a second rescue programme for Greece. 

Sarkozy told a Paris news conference that French banks would be offered 30-year Greek bonds with a coupon equivalent to the euro zone's lending rate to Athens, plus a premium based on Greece's future economic growth rate.

European Union leaders agreed last week that extra public financing to help Greece avoid bankrupcty would depend on the voluntary involvement of private sector bondholders in a way that did not cause a "credit event" and that credit ratings agencies did not brand as a selective default.

A French banking source said on Sunday the French Treasury had reached a deal with banks to make a rollover more palatable to creditors, who would reinvest 70 percent of maturing debt in the 30-year Greek bonds, of which 20 percent would go into a zero-coupon guaranteed bond based on high-growth stocks.

Whoa! That's a mouthful (figuratively andl literally). Let's see here... The lenders will reinvest 70% of maturing debt, which will allow them to derisk 30% of the current investment and get it back. But if the Greek bonds are currently trading at 50 cents or so on the dollar and the Greeks don't have the money to make good on the maturing bonds, then the investors are basically buying calls on the 70% they are leaving on the table. Those calls are coming in the form of a rather structured investment in and of itself- "who would reinvest 70 percent of maturing debt in the 30-year Greek bonds, of which 20 percent would go into a zero-coupon guaranteed bond based on high-growth stocks."

The risk on new long maturity bonds that still have signfiicant default risk may very well be worse than taking your medicine right now and calling it a day. Remember, an IMF bailout (3rd or so, but who keeps count anymore) is part and parcel to this deal. Everytime the IMF steps in, they issue payday loan terms (you know, like in the US urban ghettos and housing projects), except unlike the pay day loan sharks guys who simply take two pound of flesh and allow you to waste the balance of your paycheck accordingly, the IMF takes 3 pounds of dermis and then proceeds to instruct you on how and with whom you can engage the balance.

So, if by the 3rd IMF bailout there are still some investors left (and according to this newsflash above, there will still be some - albeit with only 70% of thier skin in the game to be cut off by the IMF) in the case of default the IMF has 3 rounds of subordination that it has forced on existing and new investors. Remember, the IMF gets paid first, unlike the EU/ECB. Since we should all agree that there is naught but faery dust and pixie vapors backing much of these fiat currency based bonds out of Greece (see Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!), if one were to assume a Lehman style recovery (ex. 6 cents or so on the dollar) and the new bonds end up trading in the same range as the "to be rolled over bonds" (ex. 52 cents or so on the dollar), then the ECB, a mutitude of private banks, pension funds and insurances companies can all get into a drawn out fistfight over those 3 pennies the IMF may let through the net! Reference LGD 100+: What's the Possibility of Certain European Banks Having a Loss Given Default Approaching 100%?

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

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What is guaranteed to be interesting is what happens if I (and many traders and strategists that I speak to) turn out to be correct and that global equity markets will continue to be on a slide as we pay the piper for the transgressions we failed to address in 2008. Well then, equity and fixed income investments take a big hit - and those new structured Greek bonds mentioned above get sacked, and then defaulted on.

Will the Irish and Portguese follow suit in issuing structured products in lieu of paying their debt in cash? There's nothing like taking 30 cents on the dollar of an invesment gone bad to the tune of 50 cents and investing the balance into an equity markets of an economy that is about to go into a recessionary spiral. Of course, there's still that additional default risk thingy. Can you imagine the losses building up on the ECB's books?