In the wee hours of the morning, Euro zone leaders arrived at a deal that pushed the European sovereign crisis back from the precipice — if only by a few feet. The basics of the deal are as follows:
- Private banks and insurers will accept a “voluntary” loss of 50% on their Greek government bond holdings. Public institutions will not share in the haircut.
- This haircut will reduce Greece’s debt burden by 100 billion euros, and will drop their projected debt to GDP ration to 120% by 2020
- Holders of CDS are now holding worthless paper, as the “voluntary” nature of the haircut avoids a technical default upon which the CDS would have paid out. There’s a lesson for those pesky speculators.
- The Euro zone will provide 30 billion Euro’s of credit enhancements to the private sector as an incentive for them to accept the “voluntary” haircut.
- The 250 billion Euro’s left in the EFSF will be levered into 1 Trillion Euros in the form of either offering insurance or some form of an SPV (Special Purpose Vehicle).
- On the news, the DJIA rallied over 300 points and the Euro/USD has traded up over 1.42.
Far be it from me to curse a good tailwind, but I think it pays to remain skeptical, if not dubious.
According to Bloomberg, the “tag along” effects have already begun as Ireland is now sniffing at the handout trough. Further, this new levered structure reminds me an awfully lot of the structure of the mono-line insurance companies — and we all know how well things worked out in for them in 2008. But, for the time being, impending doom has been reduced to delayed discomfort.
It reminds me of something I read about being hanged. From The Flexible Bullet: “You may wonder about long-term solutions; I assure you there are none. Take what’s given. You sometimes get a little slack in the rope but the rope always has an end. So what. Bless the slack and don’t waste time cursing the drop. A grateful heart knows that in the end we all swing.”
Hopefully Europe will use the slack this move has provided to arrive at a more permanent, believable solution. Otherwise, we may all swing.