Lies, Con Games and Greek Structured Finance: Jonathan Weil ...

Structured finance helped turn Greeceinto a disaster zone. It seems only natural that Greece wouldlook to structured finance once again to buy time.

The spark that accelerated Greece?s debt crisis early lastyear was the revelation that Greek authorities had used somefancy derivative trades a decade ago to mask the true size ofthe country?s debt. Today it?s Greece?s creditors who aredreaming up the wacky financial engineering, in hopes that theEuropean Union can keep pretending the nation isn?t bankrupt.

The term structured finance is simple to define, in spiteof the images of complexity it often evokes. It is the art ofmaking a transaction seem like something it isn?t, usually toachieve some desired financial-reporting or tax result.

For example, when a publicly owned company needs cash butdoesn?t want to show more debt on its balance sheet, there?s agood chance it can borrow the money and design the deal to looklike equity, even though in substance it?s a loan. Similarly,Greece would like to find a way to pay its creditors less moneythan it owes, while creating the appearance, in form, that it isrepaying them in full.

So here?s the proposal some French banks devised for a?voluntary? rollover of Greek government debt. (?Voluntary,?for these limited purposes, seems to be synonymous with?coerced.?)

Under one option, creditors holding Greek bonds that matureby June 2014 would invest at least 70 percent of theirredemption proceeds in new Greek bonds. the rest, as much as 30percent, would be repaid in cash. the new bonds? annual interestrate would be 5.5 percent to 8 percent, depending on how wellGreece?s economy performs in a given year.

The Greek government would take 30 percent of thebondholders? investments and lend the money to a special-purposevehicle that would buy 30-year, AAA-rated zero-coupon governmentbonds. the special-purpose vehicle would guarantee the principalon the new bonds in the event Greece can?t make good on them. Inessence, investors who own uncollateralized Greek bonds wouldbecome subordinate to bondholders who own the new collateralizedversion.

Under a second option, bondholders would invest at least 90percent of their redemption proceeds in five-year Greek bondspaying 5.5 percent annual interest. there would be no guarantee.

Both arrangements would constitute a default by anyobjective measure. Getting new bonds from a basket case of acountry in lieu of cash isn?t what Greece?s creditors signed upfor originally. And who is still going to be AAA in a few years,anyway? Even the U.S.?s AAA rating looks shaky.

Europe?s leaders have been begging the credit-ratingcompanies to bless the rollover proposal, so far to no avail.Standard & Poor?s has said it probably would treat the plan as adefault, although the designation might only be temporary.

There would still be other options. the European CentralBank, itself a big holder of Greek government bonds, has longsaid it would reject bonds with default ratings as collateralfor loans. It could always change that policy, so it could keeplending to Greece?s banks and prevent them from collapsing.

Another player in this drama is the International Swaps &Derivatives Association. this is the group of large banks thatdetermines when a default has occurred, for purposes of whetherto pay purchasers of credit-default swaps who bought insuranceon Greece?s bonds. the association?s general counsel in London,David Geen, has said it probably wouldn?t treat a rollover as adefault. the association can decide however its members want, ofcourse. No doubt their collective self-interest will prevail.

Everybody knows the rules; there are no rules. HereEurope?s political leaders have been trying desperately to pinblame for the sovereign debt crisis on credit raters such as S&Pand Moody?s Investors Service. in may, French President Nicolas Sarkozy and German Chancellor Angela Merkel sent the EuropeanUnion?s president a letter asking for an investigation of ?thepossible role of the rating agencies in amplifying crises,? aswell as new proposals ?to increase competition on the creditrating market.?

The same politicians then backed the French banks? rolloverplan, which depends on the ratings companies to determine thecollateral eligible for Greece?s bailout bonds. not that Sarkozyand his ilk care about logical consistencies. Their goal allalong has been to preserve the legal fiction of Greece?ssolvency, even if everyone knows it?s a lie.

Like all con games, structured finance works best when thepeople doing it believe in the con. in this instance, theyclearly never did. Better to admit Greece can?t pay its debtsand then deal with the problem, rather than delay the reckoning.

(Jonathan Weil is a Bloomberg View columnist. the opinionsexpressed are his own.)

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To contact the writer of this column:Jonathan Weil in new York at

To contact the editor responsible for this column:James Greiff at

Source: http://www.dailyrosetta.com/lies-con-games-and-greek-structured-finance-jonathan-weil/29164.html

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