Tag Archives: EU
Posted on 06. Mar, 2012 by Wilensky.
Back in 2001, Greece had a problem. The struggling country’s debt levels were simply too high to qualify for admittance to the European Union. While these regulations were in place to protect the structure of the European economy, Goldman Sachs was more than willing to step in with a timely loan which provided the necessary liquidity to hide the nation’s accumulated debt load. Essentially a perfect solution for both Greece and Goldman, here is the situation illustrated by Bloomberg:
“The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.
The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.”
Now any seasoned investor knows that when something is too complex to fully understand, chances are you should walk away. And when the other side of the trade demands that you accept the terms without shopping the price around, you definitely walk away. However, the hands of Greece’s Debt Chief were tied by Goldman’s conditions:
“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”
Again, this should have been another indicator that Greece was heading into dark waters. Yet greed overcame caution and both parties came to an agreement with a complex structure that exchanged Greek issued debt (in dollars and yen) for euros. Using and off-market interest rate swap to repay the principal, this exchange suggested that the overall load would be reduced. However, “those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.” As a result, the trading costs of the deal skyrocketed to more than the total value of the loan itself, allowing Goldman to increasingly charge higher trading fees as the value rose.
If you have a hard time following the intricacies of the loan, that’s the point. It took Greece’s Debt Chief over three months to realize the terms of the loan weren’t nearly as attractive as first believed. How could this happen on such a large scale you ask? Derivatives expert Satyajit Das has a simple explanation, “Like the municipalities, Greece is just another example of a poorly governed client that got taken apart… These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”
A “sexy story between two sinners” indeed.
Posted on 15. Feb, 2012 by Wilensky.
According to Paulson & Co., a hard default by Greece could spell economic disaster of unprecedented proportion along with the breakup of the Euro. In his 2011 recap letter to clients, he estimates $117 billion will be needed to recapitalize banks and satisfy other monetary needs.
Paulson & Co.:
“We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline,” the hedge fund said in the letter, a copy of which was obtained by Bloomberg News. The euro is “structurally flawed and will likely eventually unravel… …It seems likely that the pressure to keep the euro together becomes too great and it ultimately falls apart.”
While the firm identified the largest threat as being the overexposure of European banks who simply lack the equity to handle a crisis, they’ve had rough luck predicting the financial sector in the not-so-distant past. 2011 halved the fund’s assets, primarily due to a large stake in Bank of America and the fund sold out of their position sometime last quarter. BAC has rallied close to 50% since.
Posted on 13. Feb, 2012 by Wilensky.
Looks like one more hurdle is out of the way for Google to challenge Apple in the wireless world. The European Union allowed the deal to pass, but warned against excessive fees charged for licensing technology. The addition of Motorola’s portfolio of patents would provide the search engine giant a strong defense against infringement claims on its Android operating system.
“The European Union on Monday approved Google Inc.’s $12.5 billion acquisition of smartphone and tablet developer Motorola Mobility Holdings Inc., setting the stage for U.S. antitrust clearance expected this week. The deal will give Google a powerful arsenal of patents to use in the increasing number of courtroom battles worldwide over the hotly-contested smartphone market. But the EU’s clearance also came with a stern warning that companies should stop using certain types of patents to sue each other.”
Posted on 08. Feb, 2012 by Wilensky.
Prime Minister Papademos, Finance Minister Venizelos, and Greek Bank Governor Provopoulos are expected to sign a draft agreement to secure a $172 billion dollar rescue plan desperately needed by the insolvent country. However a couple of stipulations in the document are sure to create backlash, specifically the large cut to the minimum wage and the loss of 15,000 public sector jobs.
Greece will pledge permanent spending cuts, including lower pension payments and a 20 percent reduction in the minimum wage, as the economy contracts this year at a faster pace than originally estimated, according to the draft of a new financing deal with the European Union and International Monetary Fund.
“To restore competitiveness and growth, we will accelerate implementation of deep structural reforms in the labor, product and service markets,” according to the letter of intent addressed to IMF Managing Director Christine Lagarde in a document obtained by Bloomberg News.
The reforms outlined in the draft, which include trimming state wages, cutting 15,000 public sector employees this year and merging all auxiliary pension funds, will help Greece return to growth in the first half of next year, according to the document.
At least tomorrow’s “Angry Street Parade of Violence” should proceed on schedule…
Posted on 26. Jan, 2012 by Wilensky.
Today’s rampant fluctuation in oil was a perfect example of how much political and headline risk from Iran surround the markets. While nothing fundamental has changed from our initial assessment of the Iran situation seen here, all it took was Iran reiterating they are pissed and the IEA emphasizing to the EU that reserves exist for a reason.
NEW YORK—Iran’s threat to immediately halt oil sales to the European Union pushed prices above $101 a barrel, but crude retreated after the International Energy Agency later said it could release strategic inventories if a supply emergency occurred. Light, sweet crude oil for March delivery rose 30 cents, or 0.3%, to settle at $99.70 a barrel on the New York Mercantile Exchange, after hitting a one-week high of $101.39. ICE Brent crude gained 98 cents, or 0.9%, to $110.79.
Posted on 17. Jan, 2012 by Wilensky.
Oil markets see a bit of a boost from France’s push toward cutting the grace period before implementing a ban on Iranian crude in half, breaking a 4 day loosing streak.
Jan. 17 (Bloomberg) — France is pushing for faster enforcement of the European Union’s proposed ban on oil imports from Iran, two officials with knowledge of the matter said.
France wants the embargo to be delayed by no more than three months to allow nations including Greece, Italy and Spain to find alternative supplies, according to a French government official, who declined to be identified, citing state rules. While France is seeking a shorter exemption for existing crude purchase contracts, a six-month delay favored by more EU nations remains the more likely compromise, said the second person, an EU diplomat, who also asked not to be identified because the talks are confidential. Both officials spoke yesterday.
EU foreign ministers are scheduled to decide on the ban, which will probably also include an exemption for Eni SpA, Italy’s biggest oil company, at a Jan. 23 meeting. The embargo requires unanimity among the bloc’s 27 states. Iranian officials have threatened to block the Strait of Hormuz, through which almost 20 percent of the world’s oil flows, if exports are curbed.
Posted on 13. May, 2011 by David Spinowitz.
The latest chapter in Europe’s never-ending sovereign debt crisis comes about a year after Greece received a 110 billion euro ($158 billion) bailout package from the EU and IMF. That bailout was supposed to buy time for Greece to adopt austerity measures without having to tap the public debt markets.
Lets take a look at exactly where funding is coming from for the various PIIGs bailouts.
The total €865 billion ($1.2 trillion) pot available for euro-area rescues is rather enormous. (Whether it will be sufficient to cope with Greece, Ireland and Portugal’s needs is yet to be determined).
The sources of all that cash include the European Financial Stability Facility, (€440 billion) primarily funded by Germany, France and Italy. The IMF can kick in up to €280 billion. America has also suggested she will lend €50 billion.
Source: The Economist