How many of those Greek, Portuguese, Irish and Spanish bondholders have factored the near guaranteed "additional" haircut (/scalping) they will receive having to stand behind the IMF in the event of a (probably guaranteed) default or restructuring? Do you think the investors of European banks (that includes central banks) that are holding/and currently still buying a boat load of these bonds have factored this into their valuations?
The IMF, like many other international institutions, asserts that it has a "preferred creditor status", and this has been a practiced convention in the past. Thus, IMF has de facto seniority rights over private creditors despite the fact that there is no legal or treaty-based foundation to support this claim and this seniority of rights for IMF will continue under the recent EU rescue plan announced as well as it has not been noted otherwise implicitly nor explicitly. This is the reason why Sarkozy said it is a said day when the EU has to accept a bailout from the IMF (aka, the US). The EU now, and truly, contains a significant parcel of debtor nations.
To add fuel to this global macro tabloidal fire, the Euro members' loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, "We are not talking about a special preference for the eurogroup loans, that's not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed." (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF's super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.
IMF's preferred creditor status coupled with the expensive Euro members' loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time. This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism. I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.
Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...
Many of my readers have inquired as to why the IMF has been so inaccurate in their estimates throughout the crisis. I doubt very seriously that it is a case of ineptitude. If one were to be a skeptic, and realize that the IMF charges stringent rates and can (and does) usurp the hierarchy of the claims upon assets upon its entrance, then one can clearly see a motivation in undershooting certain estimates. I am not saying that this is the case, but I would be remiss in failing to broach the topic. Remember, this is not your typical mainstream media publication. Nothing is off limits.
|IMF Economic Forecasts (%)||2010||2011||2012||2013||2014|
|Debt as % of GDP||133.3||145.1||148.6||149.1||144.3|
The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF (remember the charts above that show how optimistic the IMF has been historically). However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don' t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accept the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt - particularly Greek sovereign debt - holdings.
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.
Members' quotas and voting power, and Board of Governors
Table showing the top 20 member countries in terms of voting power (2,220,817 votes in total):
|IMF member |
|United States||37149.3||17.09||Timothy F. Geithner||Ben Bernanke||371743||16.74|
|Japan||13312.8||6.12||Naoto Kan||Masaaki Shirakawa||133378||6.01|
|Germany||13008.2||5.98||Axel A. Weber||Wolfgang Schäuble||130332||5.87|
|United Kingdom||10738.5||4.94||Alistair Darling||Mervyn King||107635||4.85|
|France||10738.5||4.94||Christine Lagarde||Christian Noyer||107635||4.85|
|China||8090.1||3.72||Zhou Xiaochuan||Hu Xiaolian||81151||3.66|
|Italy||7055.5||3.24||Giulio Tremonti||Mario Draghi||70805||3.19|
|Saudi Arabia||6985.5||3.21||Ibrahim A. Al-Assaf||Hamad Al-Sayari||70105||3.16|
|Canada||6369.2||2.93||Jim Flaherty||Mark Carney||63942||2.88|
|Russia||5945.4||2.73||Aleksei Kudrin||Sergey Ignatyev||59704||2.69|
|Netherlands||5162.4||2.37||Nout Wellink||L.B.J. van Geest||51874||2.34|
|Belgium||4605.2||2.12||Guy Quaden||Jean-Pierre Arnoldi||46302||2.08|
|India||4158.2||1.91||Pranab Mukherjee||Duvvuri Subbarao||41832||1.88|
|Switzerland||3458.5||1.59||Jean-Pierre Roth||Hans-Rudolf Merz||34835||1.57|
|Australia||3236.4||1.49||Wayne Swan||Ken Henry||32614||1.47|
|Mexico||3152.8||1.45||Agustín Carstens||Guillermo Ortiz||31778||1.43|
|Spain||3048.9||1.40||Elena Salgado||Miguel Fernández Ordóñez||30739||1.38|
|Brazil||3036.1||1.40||Guido Mantega||Henrique Meirelles||30611||1.38|
|South Korea||2927.3||1.35||Okyu Kwon||Seong Tae Lee||29523||1.33|
|Venezuela||2659.1||1.22||Gastón Parra Luzardo||Rodrigo Cabeza Morales||26841||1.21|
|remaining 166 countries||62593.8||28.79||respective||respective||667438||30.05|
And the economic trench warfare continues on as nationalistic pride gets in the way of practicality and progresss, politics as usual...
Britain must fend for itself in event of crisis, French official warns:Britain should not rely on EU help in the event of a renewed financial crisis after refusing to sign up to the bulk of a €500bn (£429bn) rescue package for the eurozone, the head of the French financial markets watchdog said.
The UK is to be served up next. No Need to fret, we have that covered: UK Public Finances March 2010 (subscriber edition).
The Pan-European Sovereign Debt Crisis
The Asset Securitization Crisis of 2007, 2008 and 2009 led to the demise of several global banks and institutions. Central bank induced risky asset bubbles gave rise to, what was popularly considered and reported as through the popular media, a rapid recovery. The reality was that the insolvencies that marked the crisis were passed on, in part, to the sovereign nations that sponsored the Crisis, and as the chickens came home to roost the Asset Securitization Crisis has now blown into a full Sovereign debt crisis.
The Pan-European Sovereign Debt Crisis, to date (free):
Latest Pan-European Sovereign Risk Subscription Research - The Good Stuff!!!
Actionable Intelligence Note For All Paying Subscribers on European Bank Research
A Review of the Spanish Banks from a Sovereign Risk Perspective - retail.pdf
A Review of the Spanish Banks from a Sovereign Risk Perspective - professional
Ireland public finances projections
Spain public finances projections_033010
UK Public Finances March 2010
Italy public finances projection
Greece Public Finances Projections
Banks exposed to Central and Eastern Europe
Greek Banking Fundamental Tear Sheet
Italian Banking Macro-Fundamental Discussion Note
Spanish Banking Macro Discussion Note
Deutsche Bank vs Postbank Review & Summary Analysis - Pro & Institutional
Deutsche Bank vs Postbank Review & Summary Analysis - Retail
Sovereign Contagion Model - Retail
Sovereign Contagion Model - Pro & Institutional
Irish Bank Strategy Note
Sovereign Contagion Model - Retail - contains introduction, methodology summary, and findings
Sovereign Contagion Model - Pro & Institutional - contains all of the above as well as a very detailed methodology map that explains what went into the model across dozens of countries.
Euro Bank Sovereign Debt Exposure Preview
- The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
- What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
- The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can effect even the perceived "stronger" nations.
- The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
- The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
- The Beginning of the Endgame is Coming???
- I Think It's Confirmed, Greece Will Be the First Domino to Fall
- Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
- Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
- Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!
- Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of...
- The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino
- As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis
- Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?
- Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
- Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
- Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
- The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
- How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight
- Grecian News and its Relevance to My Analysis
- A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis
- Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
- Greek Soap Opera Update: Back to the Bailout That Was Never Needed?
- Many Institutions Believe Ireland To Be A Model of Austerity Implementation But the Facts Beg to Differ!
- As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!
- LTTP (Late to the Party), Euro Style: Goldman Recommends Betting On Contagion Risk In Portuguese, Spanish And Italian Banks 3 Months After BoomBustBlog
- Beware of the Potential Irish Ponzi Scheme!
- The Daisy Chain Effect That I Anticipated Appears To Have Commenced!
- How Greece Killed Its Own Banks!
- Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
- With Europe's First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination