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Greece Massive Loss of Sovereignty, E.U. Seeks to Curb Rating Firms

Interest-Rates / Global Debt Crisis Jul 07, 2011 - 02:39 AM GMT

By: Mike_Shedlock

Interest-Rates

Best Financial Markets Analysis ArticleJean-Claude Junker, the man who says "When it becomes serious, you have to lie", apparently has had a sudden splash of honesty, stating Greek sovereignty to be massively limited.

Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said.


"The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would heading to Greece.

"One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.

Massive Loss of Sovereignty is an Insult

If I was Greek, I would take a statement regarding massive loss of sovereignty as an insult, not help. Thus, true to form, in aggregate, Juncker's statements are a collective lie.

EU Seeks to Curb Big Three Rating Firms

Bloomberg reports EU Seeks to Curb Big Three Rating Firms After Portugal Downgrade.

European policy makers lashed out at rating companies after Moody’s Investors Service cut Portugal’s debt to junk, reviving calls to curtail their clout.

German Finance Minister Wolfgang Schaeuble said the grip of the big three rating companies had to be broken when asked about Moody’s downgrade. “I have said before that we have to curb the influence of the rating agencies,” Schaeuble told reporters in Berlin today. There’s a need to “break up” the companies’ dominance, he said.

European Commission President Jose Barroso said he “deeply” regrets the timing and magnitude of Portugal’s downgrade by Moody’s and said proposals for increasing regulation of the rating companies in Europe would come out this year. The moves by Moody’s “do not provide for more clarity. They rather add another speculative element to the situation,” Barroso told reporters in Strasbourg today.

The commission, the European Union’s executive arm, “is looking into the regulation of rating agencies to determine whether there are some measures that need to be taken with regard to the prevention of possible conflicts of interest and other matters,” he said. “Developments since the sovereign- debt crisis show we need to take a further look at reinforcing our rules.”

Truth Not Appreciated

I agree with Schaeuble regarding the need to “break up” the rating agencies. I have spoken about this many times. The key article is Time To Break Up The Credit Rating Cartel.

Everyone readily accepted lies about US housing debt that anyone with an ounce of common sense could have spotted an ocean away.

However, I have to laugh at the irony and motivation of Schaeuble's proposal. The fact of the matter is Moody's , Fitch, and the S&P are finally telling the truth about something.

Greek Banks Ready for Debt Rollover

Please consider Greek Banks Ready for Debt Rollover as Investors Meet to Discuss Aid Plan

Greek banks are willing to roll over their government bonds as part of a European Union aid plan, Finance Minister Evangelos Venizelos said, as debt-holders meet in Paris today to discuss their role in rescuing the country.

“The Greek banks are ready to participate,” Venizelos said yesterday in an interview with Bloomberg Television in Athens. “We must respect absolutely the voluntary character of this procedure. This is very sensitive and I give a very crystal clear answer on this topic.”

About 20 banks and insurance companies are meeting in Paris to discuss the role of bondholders in a new Greek aid plan, said the Institute of International Finance, a banking-lobby group hosting the gathering. Talks began last week in Rome under the auspices of IIF Managing Director Charles Dallara, a former U.S. Treasury official.

Incredibly Funny For Multiple Reasons

The above story is incredibly funny for more than one reason.

For starters Venizelos' statement regarding the "absolutely the voluntary character of this procedure" is straight out of the Jean-Claude Juncker "lie when it's serious" playbook.

Venizelos goes on to say he wants to “take the opportunity but not the risk.”

Everyone knows there is nothing "voluntary" about the debt rollover proposal. The idea is so preposterous even the rating agencies cannot stomach the lie.

More importantly ...

You Cannot Roll Over What You Do Not Have

The Wall Street Journal reports Greek Rescue Snarled by Sales

Europe's hopes for a significant contribution by private bondholders to a new bailout for Greece are fading, as it becomes clear that banks have sold off a substantial proportion of their Greek government-bond holdings despite pledges by some of the institutions not to do so.

Greece has about €64 billion ($93 billion) of benchmark bonds coming due in the next three years, among other liabilities, and euro-zone leaders had hoped that private lenders would voluntarily take on longer maturities in order to improve the country's battered finances.

Euro-zone officials have described €30 billion as their target for private-sector participation in the new bailout. Governments want holders of Greek bonds that mature before the end of 2014 to agree to reinvest some of the money as the bonds mature. But the €30 billion target appears increasingly unrealistic.

The problem is that the banks and insurers at the negotiating table no longer hold as much of the debt maturing through 2014 as they did a year ago. In May of last year, German banks and insurers made a nonbinding pledge to maintain about €8 billion in Greek debt and loans for three years. Yet the current Greek debt holdings of those institutions suggests they have sold some of their holdings anyway.

In an interview with Der Spiegel, the German weekly, Chief Executive Officer Michael Diekmann said Allianz had fulfilled its commitment under last year's pledge not to sell into "a falling market." He also said that the insurer had agreed not to sell only for as long as it made "economic sense."

Analysts said banks were likely to have sold off short-term Greek debt because it trades at a smaller discount to face value than does longer-term debt. Meanwhile, hedge funds and other investors, who are likely to have bought up the paper, are less likely to be persuaded to engage in the debt rollovers being proposed by euro-zone governments.

Pledge Not to Dump as Long as it Made Economic Sense

Banks dumped some Greek debt and lightened their load. Pray tell what's wrong with that?

Everyone should be happy about this, except perhaps banks that were not smart enough to dump when the dumping was good. Could that be French banks by any chance?

Pondering the After the Dump Options

The chain of amusement continues as Bankers Ponder Greek Debt Options.

Bankers on Wednesday wrapped up their latest meeting on a private-sector contribution to alleviate Greece's debt crisis, and the chairman of BNP Paribas SA said they were now pondering a range of options.

"There are a number of technical propositions that have been made," said BNP Paribas chairman Michel Pébereau on French radio station BFM. "I hope we'll find a solution that satisfies those who don't want a default and at the same time the effort from the private sector to accompany the action of public powers."

The banks are trying to figure out a way to participate in a deal to repackage Greece's debts so that European taxpayers don't have to supply all the funds—but they want to do so in a way that avoids Greece being declared in default.

The main proposal on the table is a French plan to roll over part of Greece's debt that will reach maturity before 2014. However, Standard and Poor's said Monday this plan would leave participating bondholders worse off, and therefore would probably lead to Greece being declared in "selective default."

Stiffing the Taxpayers

Please notice the key sentence "The banks are trying to figure out a way to participate in a deal to repackage Greece's debts so that European taxpayers don't have to supply all the funds—but they want to do so in a way that avoids Greece being declared in default."

Why should taxpayers have to supply any funds? Was it taxpayers that made stupid bets or banks? Those who made stupid bets should pay for them.

Betting on Bailouts

As I see it, the secretive dumping transferred some of the risk to hedge funds and others betting precisely on a guess that taxpayers will indeed pony up 100% and debt will be paid back.

This takes us back to my June 27 article Leading German Economist Buys Greek Bonds On Belief in "Boundless Stupidity of German Government", Says Bailout Programs Will Exacerbate Problems

Stefan Homburg, a leading German economist believes the bailout of Greece is exactly that wrong thing to do and will exacerbate bankruptcy problems.

Nonetheless Homburg invested a "considerable sum" in Greek bonds on belief in the "boundless stupidity of the German government to pay up".
The only thing that makes any sense is a full and complete default.

To any extent banks dumped bonds, the better off they will be in a default situation. Make the speculators and the banks not bright enough to dump foot the bill, not taxpayers.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2011 Mike Shedlock, All Rights Reserved.


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