10/31/2011 7:51 PM ET|
The euro 'solution' solves nothing
The highly touted deal to solidify Greece's finances doesn't look so good in the naked light of day. It's short on details and long on optimistic assumptions.
You know the story of the euro's new clothes, right?
One day the president of France, the chancellor of Germany and other princes and princesses from countries no one could pronounce -- so they all used initials like EFSF -- declared that they had saved the euro. And they held a big parade in celebration.
All the people in the marketplace laughed and cheered -- while eating and drinking more than was good for them.
Except for one little boy who tugged on his mother's sleeve and said, "Mommy, don't the people see? The euro has no clothes."
The people standing nearby, especially those people who were selling things to the crowd, tried to shush the little boy. "Don't worry," they said. "We just don't have all the details yet."
Yes, as the crowd says, we don't have all the details of the euro debt grand plan announced on Oct. 27. But we do have enough to do some very basic math.
And the math shows that the deal leaves the euro very naked indeed.
The bank haircut is only a trim
The markets can be excused for overlooking some of the math -- the issues are esoteric, and the parties involved are far away from the center of the financial world.
For example, it looks as if the way that the European Banking Authority calculated how much additional capital European banks will have to raise wound up going easy on French and United Kingdom banks and coming down hard on Swedish, Danish and Norwegian banks. That's because the formula for calculating how much capital a bank needs looks at risk-adjusted capital, and the European Banking Authority apparently decided that mortgage-backed bonds are less liquid than government debt -- you know, safe Greek and Italian debt -- and therefore more risky.
Scandinavian banks have relatively large portfolios of mortgage-backed debt, so a bank like Svenska Handelsbanken (SVNLF, news) will have to raise $1.1 billion in new capital while the five big United Kingdom banks will have to raise nothing at all. This, even though the credit default swaps market that insures against bank defaults says Svenska Handelsbanken is among the 10 least-risky big banks in the world. And even when you remember the size of the real-estate bubble and crash in the United Kingdom.
Some of the math is hard, but I suspect the real reason that no one is waving the numbers around is that it might blow up the politics of the whole debt deal. The biggest example of math that no one wants to examine too closely is that of the much-trumpeted 50% cut to the value of European banks' Greek government bonds, which German Chancellor Angela Merkel and French President Nicolas Sarkozy reportedly forced the banks to (grudgingly) accept.
Well, it's already clear that if you keep score the way the banks do, the size of the haircut is going to be a whole lot less than 50%. There's a good chance that the big bank concession to these tough negotiators is going to be close to the 21% haircut the banks accepted in the original Greek debt plan in July.
The way to score this part of the deal is with a financial measure called net present value. Net present value takes into account the fact that money in your hand today is more valuable than money you'll receive sometime down the road. ("I'll gladly pay you Tuesday for a hamburger today," as Wimpy says in those Popeye comics.) It's more valuable because its purchasing power isn't eroded by inflation, because money in hand is certain while promises of money aren't, and because you can reinvest money in hand to earn what might be a higher return instead of waiting for those promises to come sailing in.
So, yes, those bankers will be forced -- excuse me "offered the voluntary opportunity" -- to take a 50% reduction in the face value of their Greek government bonds. But if the new bonds that the banks receive in exchange for the old Greek bonds come with a shorter maturity -- meaning the banks have to wait a shorter time for their money -- the loss measured by net present value will be less than 50%. If the bonds carry a higher interest rate, there's again less loss when measured by net present value. If a sweetener to the deal gives banks some immediate cash payout when they sign up for their haircut, then the net present value loss will be less than 50%.
And one thing we know for certain is that Greek banks, which hold about $70 billion in Greek government bonds, will need about $40 billion to bail them out when the face value of the Greek government bonds they hold is cut by this deal. That's about $14 billion more than the rescue package included in the July deal. (And we do know who will pay that, right? It's not the Tooth Fairy.)
VIDEO ON MSN MONEY
Obama??? There’s no question the debt burden has grown by a lot during his tenure - about $3.4 trillion, but declines in tax revenues because of the recession boosted the debt burden by $1 trillion over the last 3 fiscal years. There also has also been so-called spending increases that kick in by law when the economy worsens—increased food stamp outlays as more become eligible, extended unemployment benefits, etc.
An analysis by The New York Times showed that new programs initiated by the Obama administration and approved by Congress have added $1.44 trillion to the debt while President Bush’s initiatives added $5 trillion, which was confirmed by PolitiFact.
That includes two wars, the Bush tax cuts, TARP and President Bush’s own stimulus program. Obama may catch Bush as a debt accumulator: He’s had less than three years in office to eight for President Bush. But he’s not there yet.
Jim, I always appreciate your comments, as they are usually correct. Only thing I will add is that in November 2012, the folks in D.C. must be voted out of office and a new bunch of folks put in office. Heck, I can manage my own finances better than our Government. Oh, BTW, don't get me started on Wall Street, Ha!
Grenade! Greece has just announced that after careful consideration of customer feedback, they are canceling the $5-per-month ouzo fee.
You know all these Governments have one thing in common. No backbones to really fix anything.
The US is not that far behind Greece in financial problems. We simply have the Fed and they don't.
How can MSN Money have such a good columnist as Jim Jubak, but also have such a bad one as Anthony M.? His columns should be prefaced with a disclaimer (besides the one at the end) and it should be clearly stated that he is writing for traders and risk-takers only.
PS: for most traders, the computerized quant people and the hedgies are going to eat your lunch with these whipsaw movements.
Anthony is now saying go to cash... next week, the market will recover and he'll be recommending 3x leveraged bull funds. This is a serious disservice to MSN readership and he should be canned.
Not to worry. Greece has billions stashed away in an MF Global account.
I just saw another European leader heading to the back of the plane with a parachute on. Which country will leave the union first? We need to start an office pool. Buy one square for a buck.
Monday October 31, 2011 21:48 EDT GOLD $1721.60 Source: coininfo.com
But 2012 or 2013, my math still adds up to a Greek default. This grand plan hasn't changed that, even if we don't have all the details.So what? The Greek economy isn't growing, the Greek economy doesn't mean squat to the rest of the EU or US. The economies that matter, France, Germany, Italy and to some degree Spain will not default and their economies will expand and they will print more Euros just like the US will print more USD and we will have inflation. Let's get over with this silly soap opera. Default on 50, 80 or 100 billion euros and get on with it. The US is in the process of defaulting on $14 trillion by printing $12 trillion to devalue that debt. So let the EU print some too. The civilized world have been printing fiat money for the last 60 years, devaluing debt and inflating the price of assets. Where the news in all this?
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