What? No Pawnbrokers in Downtown Athens?

I guess not.  Word is that the stars are aligning for a bailout of Greece from someone, but it’s not official as of yet.  But that hasn’t stopped the chanting for one.

“They have to be given some help from Europe or the IMF at concessional rates,” billionaire investors George Soros said in an interview on Bloomberg Radio today in Cambridge, England. “It is a make or break time for the euro and it’s a question whether the political will to hold Europe together is there or not.”

via EU Says It’s Ready to Aid Greece as Fitch Cuts Rating (Update1) – Bloomberg.com.

Soros has it all wrong.  In fact, he’s about as wrong on the Euro as he was right on the pound.  No amount of help is going to help the Greeks here.  Especially if the chart in this post at Zero Hedge is remotely accurate.  Pawnbrokers could probably give them a better deal on short-term money. Or what about those car title shops?  You know the ones: you need $1,000 for a week, they take the title to your car until you pay them back.  Plus interest, of course.

Just don’t walk in to the pawnshop with those 2yr, 5yr, and 10yr bonds.  They don’t do that kind of lending.  The deed to the Parthenon isn’t going to sway them.  Would they take health care equipment from the hospitals?  Don’t know, tough to say.  It’s certainly more liquid than the Parthenon.

But back to Soros.  An IMF/EU loan will just prolong the decline of the Euro, acting as a headwind to the original intent of the EU: fiscal policy and monetary policy discipline to prevent the ravaging effects of inflation upon a fiat currency.  A concessional rate loan would bring on pressures of a different kind: a devaluation of the currency.  Indeed, the long-term macro set-up is a devaluation no matter how it occurs.

Reuters is now out with a story that may be spelling out terms that could find their way to a term sheet:

A second source confirmed the rate would be more than six percent. Both noted the calculations were complex, because they were based on a three-month Special Drawing Rights rate that needed to be converted to 3-year rates using swap rates.

According to the formula, there would also be an extra 300 basis points on top of the SDR rate and an additional 50 basis points service charge.

For loans over 3 years maturity, there would be an additional 100 bps penalty charge, the first source said.

via Euro zone would charge Greece more than 6 pct-sources | Reuters.

So what are we looking at?  SDRs are the “currency,” and the rate is a swap rate (remember, swaps are a play on fixed vs. floating rates) based on the expectation of where the 3mth SDR denominated swap rate is 3 years from now.  How?  By coming up with a fixed rate based on dollar, pound, yen, and euro denominated 3yr swap rates blended together.  It’s not easy to understand, and hell, I may have gotten it wrong.  So by no means treat what I’m saying here as gospel.   But you can calculate the rates and the curve collectively based on the today’s 3 month rate and other inputs.  For those so inclined, you can read more about swap curve construction here:

So here we are, going into what some described as a Paulson-style weekend, only for a sovereign instead of a bank/financial institution.

That reminds me: I need to check the FDIC website.  I expect it won’t be quiet for much longer.


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Filed under finance, government, International, macro, Markets, Way Forward, You're kidding

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