Greek Financial Crisis: A Failure to Communicate

"Cool Hand Luke" (1967) with Paul Newman and George Kennedy. Outside of the hard-boiled egg eating competition, the best line belonged to Strother Martin. "What we've got here is a failure to communicate" became his byline. That is, until "Butch Cassidy and the Sundance Kid."

He played the "colorful" mine owner that hired Butch and the Kid and was shot by bandits for the payroll. Not too bad for a former University of Michigan diver that just missed making the Olympic team.

A protester wears a national flag near to the Syntagma square in front of the Greek Parliament.
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A protester wears a national flag near to the Syntagma square in front of the Greek Parliament.

Clearly, all over Europe, we have a failure to communicate. Thankfully, the Greek Parliament approved the austerity program earlier on Wednesday. The fact that it was at risk was insane.

A default, which would have been triggered by a negative vote, would have thrown the euro zone into chaos, and Greece especially would have been decimated. Folks were not paying attention to the risks involved.

The Rube Goldberg contraption (Rube was a cartoonist of many years ago that created the most complicated machinery to perform the simplest tasks) being bandied about the holiest of holy euro-zone corridors might work in buying time, but the ratings agencies have said it would signal a "credit event" or a default.

The French Plan, as it is being called, would have private investors "voluntarily" agree to reinvest 50 percent of their Greek bond holdings that come due by mid-2014 in new Greek 30-year bonds. The coupon would be 5.5 percent plus a premium depending on the growth of the Greek economy. Currently, you couldn't sell 30-year Greek bonds at any price so the rating agencies are stuck on how voluntary this could really be.

Thirty percent of the debt is repaid, and the last 20 percent is placed in a Special Purpose Vehicle (hey! remember Enron and their SPVs). An AAA-rated country, like Germany, or a "supranational agency" like the European Union would issue 0-percent coupon bonds with sufficient face value to collateralize the entire 70 percent.

Greece, or the SPV actually, buys these 0-percent coupon bonds as security. But Athens only realizes 50 percent of the funds of the maturing bonds net/net in the voluntary rollover (30 percent being repaid and 20 percent is used to buy the 0-percent collateral). The other 50 percent is supposed to come, in part, from Greece selling stuff, like the State Railroad where costs are four times revenues.

So, the EU/IMF/ECB will probably have to loan Greece the money. But that's down the road where the can has been kicked. This is a farce. And, the rating agencies are saying they will declare Greece to be in default so who is not listening here?

This is a sort of euro version of the Brady bonds of the late 1980s. But Brady bonds replaced bad bank debts. The haircut was taken at the exchange, and the banks received liquid new instruments they could hold or sell. Under the French plan, forget the ratings agencies might kill it, banks get some guarantees, but Greece gets no debt relief.

They will still not have access to the credit markets. The haircut will be in the future. Greece gets some liquidity to survive another day, but the country is still insolvent. We will see this movie again!

The stock market decided to listen to the word "relief" regarding Greece and like Pavlov's dogs, responded by buying risk. The euro rallied, causing the dollar to fall. A decline in the dollar made oil cheaper and attractive for a trade, and the stock market responded accordingly. Up is up and is better than down. But I still fear some downside when the quarter is over in two days.