Europe’s Web of Debt

Interesting chart about the Greek debt, via the NYT:

Banks and governments in these five shaky economies owe each other many billions of euros — converted here to dollars — and have even larger debts to Britain, France and Germany. Arrow widths are proportional to debt amounts.

Argentina: Sharpening Pencils

As the Argentine debt exchange marches closer, investors are taking another look at the valuation of the deal. Although the government has yet to produce a term sheet, many of the parameters are known. To begin with, investors will be allowed to tender their defaulted bonds for Discount bonds. The government said that the Discounts will be the same as the ones that were issued more than five years ago. That means that the new bonds will have a factor of 1.27. We must recall that under the terms and conditions of the original exchange, the Discounts had a coupon of 8.28%. However, 3.97 was paid in cash for the first three years, and 4.31 was capitalized. Furthermore, the bond began accruing interest as of December 31st, 2003—which further boosted the factor.

Argentina: Reopening the Exchange

With a bit of theatrical flair, Economy Minister Boudou formally announced the reopening of the 2004 debt exchange. However, the terms of the transaction were far from precise. It seemed that Buenos Aires was still waiting for final approval from the regulators in the U.S., Luxemburg, Japan and Italy. Hence, there was no term sheet. Still, the general framework was in line with what had been rumoured for months. The holdouts will be offered Discount Bonds, with the same haircut as in the 2004 transaction. In other words, for every 100 defaulted bonds tendered, they will receive 33.6 new bonds. Furthermore, they will be compensated for the past due interest (PDI) that was accrued since the original exchange was completed. Given that there were five years of unpaid interest, at 8.28% p.a., the gross accrued will be 41.4 cents. However, this will be reduced by the same haircut as the principal amount, and the resulting PDI will be 13.9 cents. Minister Boudou said that the PDI will be paid in the form of a new bond that matures in 2017. There was no mention of what will be the coupon on the new instrument.

Greek 6M-1Y Curve Inverted, Spread Difference Between 3M And 6M Almost 300 Basis Points

As an indication of just how royally… busted… things are in Greece, note the most recent GGB curve below. While the 10s30s inversion is not too surprising as at this point nobody expects Greece to be solvent for 30 years, what is more amusing is the inversion of the 6 Month – 1 Year points. Furthermore, the surge between 3 and 6 months over almost 300 bps indicates that the market is pretty much convinced D-Day for Greece will occur, as we expected, sometime between July and September. Which is two months before the Mid-Terms…. And is two months before the deadline that the fmr Israeli Deputy Defense Secretary said Israel will likely have to attack Iran by. Second half of 2010 should be significantly more volatile than the past 12 months.

Alan Greenspan Keeps on Saying He Did Not Do It…

Recently, Robert Samuelson (Washington Post, Newsweek) (http://newsweek.com/id/235202) analyzed Alan Greenspan’s standard response to his critics: “I (Alan) only controlled the short-term rate, but what determines mortgage rates is the long term rate and I did not control it; it depends on the Chinese (and other people) saving too much at the global level.” Samuelson goes on to argue that in fact Greenspan was at fault not for having been a bad central banker but for having been too good at his job; in fact Greenspan’s Fed was so successful in smoothing the business cycle that people forgot about it and underestimated risk. 

Enron and Merrill, Greece and Goldman

Did big banks break the law during our recent global debt-fuelled boom?  The usual answer is: no – they just took advantage of loopholes and captured regulators.  The world’s biggest banks are widely supposed to be too sophisticated to be tripped up by the legal system.

Still Buying Treasurys…

Today’s report that China’s holdings of Treasurys slipped to US$889 billion in January 2010 surely added grist to the fire surrounding the heightened tensions in the pivotal bilateral relationship.  These tensions are coming to a head in U.S. and Chinese legislative sessions and imply that coming weeks and months may be filled with more posturing as we wend our way to a series of bilateral and multilateral meetings.  Policy makers from both countries are starting to draw lines in the sand and it remains to be seen how far they will go to defend these lines. This posturing, if it is posturing, could be counterproductive in the long-term. Both sides are sorting out how strong their hands are…More on this to come from us later this week.

Is Africa Back?

During his recent visit to Sub-Saharan Africa, IMF chief Dominique Strauss-Kahn penned a piece Africa is Back which exudes optimism of an economically brighter sound future for the region, which has been emerging from recession.  Kahn stopped by South Africa, Kenya and Zambia where he met members from the business, political and academic communities to evaluate the effects of the global financial crisis on the continent. Kahn stressed that sound economic policies adopted by African nations, including countercyclical monetary and fiscal policies have helped them buffer the effects of the crisis and it is these policies that will ensure stronger growth in the future. Stable domestic governance will underscore the African growth trajectory.  He argued that unlike other crises this time Africa’s recovery is not lagging global recovery but is occurring almost at the same pace.