Greek Sequel

News and timelines

The Greek government presented their Medium Term Plan (MTP) to the cabinet. Total package is for 28bln and half would come from cutting expenses and the other half would be new money from tax raids and fast tracking asset sales.

Voting on the MTP is scheduled for  the 28th of June, but they may move it forward to the 23rd , while the IMF has to release the 5th installment by 15th July and the negotiations with the Eurogroup would finish by the 20th June.

There are also press reports that the Greek PM would address the people today. If he does we do not expect to say anything life changing. A possible cabinet reshuffling is on the cards but it would probably come just after the MTP.

Germany vs ECB

It is now clear that Europe is totally divided with Germany favouring a new loan to Greece but on condition that existing holders of bonds maturing up to 2012 will be re-profiled. In other words they would reinvest “voluntarily” into new 7Y bonds with perhaps some sweeteners. This plan would probably be put forward in the next few hours by the German coalition and it would be contingent on IMF support and the german parliament.

On the opposite side is the ECB which opposes any sort of restructuring and favours adherence to fiscal austerity and reforms while providing bailout II. We believe that the ECB plan is more credible. Yes, with the German plan, private investors share some of the burden but here are our objections:

• The minute reprofiling is announced they would be a run for the exit from bond holders of Irish, Spanish, Portuguese and possibly Italian bonds for fear that they are next in line to be reprofiled. Thus we have a big contagion risk.

• Get your money now or NOT get your money in 7Y. The new bonds would have maturity of 7Y well into the ESM territory and thus with significant risk of being restructured to death. Unless, the reprofilers have some sort of immunity or credit enhancement which is by definition a credit event and CDS are triggered.

• Rating agencies have indicated that even a voluntarily reprofiling may be treated as a credit event.

• About 12bln of bonds maturing in 2011-12 are in Greek banks and in principle easy to coerce (sorry volunteer). But this is not in the best interests of the Greek economy as you would need healthy banks to drive you out of your death spiral.