Top Greek Bond Holders

Barclays Capital compiled a list of the top holders of Greek debt, revealing who is going potentially to face the biggest problems in the event of default or selective default that is currently under discussion.

To see a description of the top 20 institutions shown in the above list look here.

The conclusions from Barclay’s study are:

“In our previous research on the holders of Greek debt (see for example Euro Themes: Implications of Greece restructuring for banks and CDS, 3 June) we highlighted that these holdings are actually quite concentrated (with the top 30 holders accounting for 70%+ of the total). In this report, we update these numbers and show the details of the biggest holdings on a name-by-name basis. The vast majority of the information comes from disclosures by the companies themselves (for private sector holders, mainly banks and insurance companies), or some official data (for public sector holdings or loans data). In fact, there are only a few holdings that are not up to date as of Q4 10 or Q1 11 or that we have had to estimate (eg, the ECB SMP holdings or some of the central banks holdings, although admittedly, these are probably among the biggest holders). We would also highlight that this data/information has been in the public domain for some time, and so should not be a particular surprise to financial markets, rating agencies and commentators.

The high concentration of holdings, and the type of institutions involved, suggests that some kind of voluntary rollover/Vienna initiative might have more take-up than one might expect at first glance. Having a participation of €25bn in such an initiative (as has been mentioned in the press) over the coming three years seems plausible, in our view.

Certainly, the Greek holders would have a natural incentive to roll over their debt. The Greek pension and social security funds (managed by the Bank of Greece) would clearly be in that case, although it may not have much debt maturing in the coming years. Greek banks are likely to have a mix of maturities in their portfolios, but we would think that probably more than a third of it is maturing in the coming years. One concern on the banks side has been the ECB stance that it would not accept Greek collateral anymore if any private sector involvement was not fully voluntary and/or would trigger a default, and that Greek banks would therefore have to reduce their holdings. We believe one potential way around this would be for the ECB to announce some kind of medium-term ‘addicted banks facility’ that would cover Greek, Irish and some Portuguese banks. This is something the ECB has been mulling for some time, and is linked somewhat to the decision on full allotment in open market operations. Such a facility could provide more security in terms of availability of ECB funding on a medium term to these banks (which will provide or have already provided medium-term liquidity and deleveraging plans to the ECB), and be more flexible in terms of the collateral it accepts than the ‘single list’ that the ECB is using for OMOs (whether or not rolled over debt is considered in default or not seems to vary depending on the rating agency). Such a separate facility would obviously come at a price, in terms of bigger haircuts and potentially a premium interest rate which may be linked to the regular OMOs (which may, or may not, at the same time, revert to variable rate tenders for 3m maturities; the ECB is likely to keep full allotment on the weekly MRO for longer in any case). Over the past few weeks, a number of statements and signs suggest that the ECB might be nearing a decision on this, something which could possibly be announced in September or even earlier (the decision might be precipitated by the downgrade by S&P of Greece and Greek banks to CCC recently). Independently, though, it could be that there would still be the problem of financing of Greek bonds by non Greek holders, if the ECB were to exclude GGBs from its single collateral list (unlikely if there is a simple rollover).

In any event, any additional NPV loss inflicted on Greek banks would require further recapitalisation of these institutions. Under the original EU IMF programme, EUR10bn has been ear-marked for bank recapitalisation. Given the weaker macroeconomic performance and more rapid increase in NPLs than anticipated under the programme, any additional NPV losses associated with public debt rollover at below market rates will require almost a onefor-one capital increase in the context of a new EU/IMF programme.

Rating agencies have been mixed on whether a roll over would constitute a default, a selective default or have limited influence. The bar, though, seems to be quite high for it not to constitute a default on their criteria.

The exact way to involve the private sector and/or do bond rollovers is clearly what the Eurogroup will be focusing on in the coming weeks: this is obviously something that, if done, needs to be done correctly and not rushed through, as a large number of unintended consequences could have a dramatic impact on financial markets. In this regard, we believe different views between Germany and other EU countries on burden sharing by bondholders are likely to be resolved in the coming days, with Germany possibly moving towards the voluntary roll-over proposed by other EU members (and that the ECB appears to support), most likely one based on the principles of the Vienna Initiative.”

Gkikas Hardouvelis Comments On Greece

Economist Gkikas Hardouvelis, Professor of Finance at the University of Peiraius, and Chief Economist at Eurobank, comments on the current situation in Greece.

Professor Morici’s Commentary on Greece’s Debt Problems

A great commentary for the simple reason that it is clear and spelled out completely. One of the best perhaps lines is that “Politicians are like children in a candy story," he says. "They don't worry about the cavities they will receive or the money their parents will have to pay filling those cavities. They just want their candy now."

Important Economists Talk About Greece

New Reserve Currency In The Making (?)

After the World Bank made the case for a new reserve currency, more than a month ago, these voices were repeated from the IMF’s managing director Dominique Strauss-Kahn who on February 10, 2011, also called for a new world currency, because he is worried about volatility in the foreign exchange markets – see here . The same thoughts were again repeated by Mr. Strauss-Kahn on February 26, 2011 (see here). He envisions an asset the could be similar but distinct from the IMF’s SDRs. He said that having other alternatives to the dollar “would limit the extent to which the international monetary system as a whole depends on the policies and conditions of a single, albeit dominant, country.” Countries that have called for an alternative to the dollar as a reserve currency include Russia and China, and other European countries have voiced concerns about the role of dollar, like France’s president, Sarkozy.

Enhancing the role of alternative to dollar currency assets is not a new discussion but it goes back to the creation of the SDRs as a substitute of the dollar-gold exchange rate in 1969. The current discussion though has been active the last few years, especially after the global debt crisis and the monetary policies of key player countries which arguably cause debasing of global currencies, bring new inflation fears and volatility in the currency markets. In an attempt to stabilize currency markets the IMF issued new international money worth of $250 billion, in 2009 (see here).

All these bring us to renewed concerns about the difficulty to maintain reserve currency status for the dollar by Prof. Michael Kuczynski from Cambridge University, as it is expressed in his comment in FT today, and also on the G20 meeting in Paris where IMF’s Strauss-Khan wants the Renminbi in SDR.

Reserve Currencies

Even though dethroning the dollar from its current status as the primary reserve currency is not something that can happen in the current setup, there is discussion about what being a reserve currency means and what are the alternatives to a dollar reserve currency.

FT published an article on the subject and can be found here. It considers a few alternatives like (a) the renminbi, (b) the euro, (c) SDRs (Special Drawing Rights), (d) pegging to gold price. A lot of research has been done on these issues and some thoughts are presented in this article about the pros and cons of being a reserve currency or having one of the alternatives as reserve currency. Bellow are some passages taken from the article together with some of my own thoughts on the matters. The parts taken from the article are in quotation marks.

One reserve currency?

“In truth, the benefits to the US, in terms of support for its currency and its financial assets, are uncertain. Also unproved is the wider case that having just one reserve currency is inherently unstable, contributing to the global current account imbalances that are widening again as the world economy recovers from recession.”

Is one reserve currency an unstable structure because it leads to the currency’s devaluation according to the Triffin’s dilemma?

“On the face of it, a modern version of the Triffin critique explains recent persistent American current account deficits; they have been funded largely by foreign governments buying dollar bonds. But the causation is not straightforward. Under a floating exchange rate system, as long as countries accumulate only moderate amounts of currency reserves allowing them to intervene in any future crisis, the demand for dollar-denominated assets should be limited.”

Are SDRs a good alternative to one reserve currency?

“The SDR is closer to an accounting unit than a currency.”

“In order for the SDR to work as a proper global currency, Prof Eichengreen says, some organisation – probably the IMF – would need systematically to control its issuance beyond the current system of ad hoc one-off distributions. Any such proposal to globalise monetary policy would provoke explosions of disbelief in legislatures worldwide. As Prof Eichengreen concludes: “No global government, which means no global central bank, means no global currency. Full stop.”

Linking currencies to the price of gold?

“An even less likely option is linking currencies to the price of gold, recreating one of the models of international gold standard used in the past few centuries. Following the rapid rise of the gold price in recent years, a phenomenon some investors claim is driven by fears about fiat currencies (those not backed by a physical commodity) being debased by inflation, interest in the subject was revived last year by Robert Zoellick. The World Bank president raised the eyebrows of economic policymakers – before rushing to clarify that he was not in favour of a strict gold standard – by arguing that the metal had become an “alternative monetary asset” and that governments should consider using its price as an “international reference point of market expectations” for inflation and currency values.”

“However, economists have long argued that linking currencies and price levels to the value of a fixed or nearly fixed stock of precious metal means forcing real variables such as growth and employment to bear the brunt of economic shocks – a socially and politically unacceptable outcome. Prof Eichengreen, in response to Mr Zoellick’s speech, pointed out that targeting the domestic price of gold would have caused the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England to have tightened monetary policy sharply in recent years. “It is lunacy to suggest that in circumstances of weak growth and deflation risk, key central banks should simultaneously tighten [policy],”

How about the Euro or the Renminbi?

For these two currencies to be used as reserve currencies they need to strengthen. By that is meant, to strengthen their institutions. For the Euro, Europe has to overcome its current debt crisis, and to emerge from it stronger. In this case Euro may gain some power as a reserve currency.

As far as the Renminbi is concerned, this is a more remote possibility. Perhaps in 30 or more years Renminbi could play a role as one of the reserve currencies. Until then, the Chinese institutions should have to strengthen and be accepted from the rest of the world. It is not just the size of the market that matters but also the stability of its institutions and the trust of the rest of world on them. This is by far the most important determinant of a currency in order to gain its reserve status. 

Roubini On Risks

Euro Under Attack

A video about the crisis in the Eurozone. The inside story of important events during the Eurozone crisis. Appear, Jean-Claude Trichet, George Papaconstantinou, Jean-Claude Juncker, George Soros, Christine Lagarde, Olli Rehn, and others. It is in French, with Greek subtitles.

Roubini about Greece and Europe

An article with the interesting opinions of Roubini on Greece, Europe and Euro. The article is in Greek.

Jacques Attali Admits Problems With The Euro's Construct And Reluctance By Eurpoean Politicians To Address Them

Mr. Jacques Attali, counsel of president François Mitterrand, admits in an interview given to greek journalists that the deficiencies of the Euro project were known at the time of EMU's creation. Mr. Attali says that they knew that Euro and eurozone economies would have problems if the creation of the Euro was not associated with centralized eurozone fiscal policy. He emphasizes that EU decided to move towards greater expansion rather than deeper expansion which would have strengthened European economies. Another important comment he makes is that Europe has been reactive rather than proactive. In addition, he finds that the reflexes of European leaders have declined significantly and currently the responses are very much delayed. Currently, the developments are dictated by the markets, rather than by the politicians. Politicians follow with great delay, something that was not the case during the years of François Mitterrand, as he says. To listen to the interview, which is in Greek click here.