$heff's $tation of $tocks & $olid DD

[bob smith]

greek bailout finalized.

http://finance.yahoo.com/news/second-greek-bailout-reach-funding-gap-narrows-015256172.html

BRUSSELS (Reuters) - Euro zone finance ministers approved on Tuesday a second bailout for debt-laden Greece that will resolve Athens' immediate repayment needs but seems unlikely to revive the nation's shattered economy.

After a marathon 12 hours of talks through the night, euro zone officials said ministers had agreed measures to cut Greece's debt to around 121 percent of gross domestic product by 2020, close to their original target of 120, after negotiators for private bondholders offered to accept a bigger loss to help plug the funding gap.

Agreement on a 130-billion-euro rescue package with strict conditions attached will help draw a line under months of uncertainty that has shaken the currency bloc, and avert an imminent bankruptcy.

"The financial volume (of the Greek package) is 130 billion euros and debt-to-GDP (will be) 121 percent. Now it's down to work on the statement," one official involved in the negotiations told Reuters. Another confirmed the two figures.

The euro jumped almost half a cent, reversing earlier losses, after Reuters reported a deal had been struck.

A report prepared for ministers by EU, European Central Bank and IMF experts, obtained exclusively by Reuters, said Greece would need extra relief to cut its debts near to the official debt target 2020 given the ever-worsening state of its economy.

If Athens did not follow through on economic reforms and savings, its debt could hit 160 percent by that date.

"Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," the 9-page confidential report said, highlighting the fact that Greece's problems are far from over.

The accord will enable Greece to launch a bond swap with private investors to help reduce and restructure Athens' vast debts, put it on a more stable financial footing and keep it inside the 17-country euro zone.

Greece will have around 100 billion euros of debt written off as banks and insurers will swap bonds they hold for longer-dated securities that pay a lower coupon.

Private sector holders of Greek debt are expected to take losses of 53.5 percent or more on the nominal value of their bonds as part of a debt exchange that will reduce Greece's debts by around 100 billion euros.

Previously they had agreed to take a 50 percent nominal writedown, which equated to around a 70 percent loss on the net present value of the bonds.

The debt sustainability report delivered to ministers last week showed that without further measures Greek debt would only fall to 129 percent by 2020.

The IMF had said if the ratio was not cut to near 120 percent, it may not have been able to help finance the bailout.

Diplomats and economists say the deal may only delay a deeper default by a few months. A turnaround could take as much as a decade, a prospect that brought thousands of Greeks onto the streets to protest against austerity measures on Sunday.

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Euro zone crisis in graphics http://r.reuters.com/hyb65p

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DOUBTS OVER COMMITMENT

Skeptics question whether a new Greek government will stick to the deeply unpopular program after elections due in April, and believe Athens could again fall behind in implementation, prompting exasperated lenders to pull the plug once the euro zone has stronger financial firewalls in place.

While there are doubts in Germany and other countries that Greece will be able to meet its commitments, including implementing 3.3 billion euros of spending cuts and tax increases, the threat of contagion from a chaotic Greek default always made a deal more likely than not, no matter how tortuous the negotiations.

Greek Prime Minister Lucas Papademos, International Monetary Fund Managing Director Christine Lagarde and ECB President Mario Draghi all attended the Brussels talks in a sign they were likely to be decisive.

The private creditor bond exchange is expected to launch on March 8 and complete three days later, Athens said on Saturday. That means a 14.5-billion-euro bond repayment due on March 20 would be restructured, allowing Greece to avoid default.

The vast majority of the funds in the 130-billion-euro program will be used to finance the bond swap and ensure Greece's banking system remains stable: 30 billion euros will go to "sweeteners" to get the private sector to sign up to the swap, 23 billion will go to recapitalize Greek banks.

A further 35 billion will allow Greece to finance the buying back of the bonds, and 5.7 billion will go to paying off the interest accrued on the bonds being traded in. Next to nothing will go directly to help the Greek economy.

Those numbers could change in the final analysis given the scramble to meet the overall objective of reducing Greece's debts from 160 percent of GDP to around 120 by 2020.

Earlier, euro zone sources said national central banks in the currency bloc could restructure Greek bonds held in their investment portfolios in the same way as private investors, cutting Athens' debt by 3.5 percentage points.

If the ECB were to forego profits on its Greek holdings, that would raise another 5.5 percentage points of GDP, the report showed.

The deal will provide immediate relief to Athens and financial markets but no one is pretending it will end Greece's problems. Figures last week showed its economy shrank 7 percent year-on-year in the last quarter of 2011, much more than expected, with further cuts likely to make matters worse.

The troika of European Commission, ECB and IMF, responsible for monitoring Greece's reform progress, carries out quarterly reviews and could decide Athens is not meeting its commitments at any one of them.

BUT, will we revisit this again?

The first details of the Greek bond deal are leaking out via Reuters, and we now learn the reason for the Greek bond sell off in recent days:

•UNDER GREEK DEBT SWAP, PRIVATE SECTOR WILL GET 3% COUPON ON BONDS FROM 2012-20, 3.75% COUPON FROM 2021 ONWARDS [2021... LOL]
•PRIVATE SECTOR WILL ALSO GET A GDP-LINKED ADDITIONAL PAYMENT, CAPPED AT 1 PCT OF THE OUTSTANDING AMOUNT OF NEW BONDS [If it appears that nobody gives a rat's ass about this bullet point, it's because it's true]
•GREEK BANK RECAPITALISATION NEEDS MAY NOW BE AS MUCH AS 50 BLN EUROS-DEBT SUSTAINABILITY ANALYSIS
Which in turn explains the sell off in pre-petition Greek junior triple subordinated bonds (i.e., those held by private unconnected investors, which are subordinated to the Troika's bailout loans, to the ECB's SMP purchases, to the Public Sector bonds and to UK-law bonds in that order). With the EFSF Bill "sweetener" amounting to about 15 cents (and likely less), the fact that bondholders will receive a 3% cash coupon, a cash on cash return based on Greek bonds of 2015 trading at just 20.7 cents on the euro, indicates that investors are expecting to collect 1 cash coupon payment, and at absolute best 2, before redefault, as buying a 2015 bond now at 20.7 of par, yields a full cash return of 21 (15+3+3), thus the third coupon payment is assured not to come. And since there is a substantial upside risk premium kicker to bond buyers, in reality the investing market is saying that Greece will last at best about a year following the debt exchange (if it ever even happens) before the country redefaults.

Oh, and by the way, the fact that creditors just got even more bent over, just assures that Greece can kiss the 75% threshold for PSI acceptance goodbye. Hello CACs, and CDS trigger.

Some more just out of Reuters:

Greece will need additional relief if it is to cut its debts to 120 percent of GDP by 2020 and if it doesn't follow through on structural reforms and other measures, its debt could hit 160 percent by 2020, a debt sustainability report by the IMF, European Central Bank and European Commission shows.

The baseline scenario is that Greece will cut its debt to 129 percent of GDP in 2020 from 160 percent now, well above the targeted 120 percent, the confidential, 9-page analysis prepared for euro zone finance ministers showed.

"The results point to a need for additional debt relief from the official or private sectors to bring the debt trajectory down," said the report, dated Feb. 15 and obtained by Reuters.

The report forms the basis of discussions of euro zone ministers on the conditions under which Greece is to get further financial help from the euro zone and the IMF.

"There is a fundamental tension between the program objectives of reducing debt and improving competitiveness, in that the internal devaluation needed to restore Greece competitiveness will inevitably lead to a higher debt to GDP ratio in the near term," the report said.

"In this context, a scenario of particular concern involves internal devaluation through deeper recession (due to continued delays with structural reforms and with fiscal policy and privatisation implementation)," it said.

"This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020. Given the risks, the Greek program may thus remain accident-prone, with questions about sustainability hanging over it," it said.

It appears nothing has been resolved. YET AGAIN