With bondholders agreeing to “voluntarily” accept 50 percent writedowns on Greek debt, last Thursday the Euro STOXX 50 jumped 5.9 percent and the S&P 500 over two percent.
Today, the Euro STOXX 50 dropped 5.3 percent while the S&P 500 is trading down 2.6 percent as the Prime Minister of Greece has promised to put the terms of the bailout plan (and its austerity measures) to a (not so popular) vote amongst the people of Greece.
Equity Markets Jump As Holders Of Greek Debt Are Jabbed [SocketSite]
U.S. Stocks Slump as Greek Referendum Threatens Bailout [Bloomberg]

34 thoughts on “Financial Markets Balk At Vote To Accept Voluntary Writedowns”
  1. This kind of thing fascinates me. I’ve been wondering how it is that the consent of the bondholders is being sought at all, but I’ve finally realized that their cooperation is needed to maintain the pretense that this is not a default. Thus they can ask for more money on the dollar than their bonds are actually worth, and get European governments to kick in the difference. Did I get that right?

  2. Will Greeks have their say on the (self?) inflicted pain? Will we see democracy at play getting in the way of the agreed status quo?
    People outrage causing a reversal of Debit card fees at JPM-Chase, BOFA, WFC, …
    Netflix customers fleeing in droves on principle and causing a reversal of a top-down corporate decision.
    Oh boy the times they are-a-changing.

  3. More likely then then changing times is that there simply never was a real deal in place. The people at the summit felt they had to show some progress so they announced a most voluntary light on details “plan” just to show that something was being done. The referendum will most likely fail and is probably the greek PM passing off any accountability.
    @Po Hill Jef – Just as some home sellers bought at the peak and are now underwater, while others bought well prior and could sell below market and still make a profit. Undoubtedly there are some holders of greek bonds who bought them at face value, while others bought them at an already distressed price and could agree to a haircut and still make a profit. Note though that buying at 40 cents on the dollars and getting a deal for 50 cents on the dollar isn’t necessarily a profit since if the deal is thought to be ineffective greek bonds may still trade at a discount after the swap.

  4. I love all the rage getting pointed at G. Pap., “Hey, you were supposed to just inflict this on your country without asking!”

  5. Seems to me the biggest problematic thing with respect to the referendum is that it is planned to happen in January.
    That’s a long time for “the market” to price in the impact of the vote going the way of NOT embracing continued austerity measures. And then Greece defaulting, almost immediately. And then Greece being kicked out of the Euro. And then Greece returning to the Drachma. And then Greece having to do a massive, massive bank bailout because most debts are still denominated in Euros. Currency devaluation. Spread of “contagion”. All that and more!
    That’s a lot of drama in the making that will play out of the next three months. Those overpriced treasury bonds that everyone was dissing a few months ago are looking better and better…

  6. Note to holders of Greek debt. You lent to Greece. Holders of this debt will take a 100% loss on principal. The only reason Greece is still talking to you is the small possibility dumbasses like you might lend Greece even more money while Greece pretends to consider only a 50% write-down.

  7. I still wonder if we’ll see Eurobonds before this whole thing is played out. Greece is to the Eurozone as Mississippi is to the US. I know, not that simple, but Eurobonds could give Treauries a run for the money. Then again, I’d hate to see what it looks like when they call in the ‘National Guard’ to quell Greek unrest. One currency, indivisible, with liberty and justice…

  8. I doubt we’ll ever see this referendum. Either the Greek govt will fall and the new govt will nix this idea, or they’ll move forward with it but that very act will drive a Greek default that will moot the whole thing and the sh** will hit the fan.

  9. It’s complicated to follow but it seems like there is a fair amount of misunderstanding from these comments about the votes. The latest is that Papandreou is pressing on with it though one by one they have dropped today and he was down to 149 out of 300 when I left work an hour ago. There is a confidence vote that should take place Nov 4th and if that fails there would be an election probably in December but it is more likely that Papandreou would resign. The referendum vote is separate and doesn’t have a date; Papandreou said in several weeks; his FinMin Venizelos who is in the hospital today said the referendum vote would not take place until January. The 50% PSI that was negotiated last week was only one part of the second bailout package. Separate from all of this, the Greek government will again run out of cash– maybe they can stretch to mid November. But they need that sixth tranche of 8B euro to continue functioning.
    It’s bad. It’s unexpected. And in the meantime, check out Italian yields and the BTP/Bund spread reaching new highs.
    EB Guy– you’re asking the right question but there is tremendous opposition to Eurobonds still– esp from Germany. It is the ultimate solution but we are very very far from it being a solution to the current crisis. And you are right, a Eurobond would completely the change the dynamic for the US Treasury market.

  10. Ebguy, brahma, and especially nanon, your comments are well taken.
    Here goes the human piranha impression.
    Ebguy – Greece is to europe as Mexico is to the us. Great sun, nice beaches.
    brahma – The unsecured debt holders are sah-crewed. “they’re gonna get their faces ripped off”
    domestically, the printing presses go on, and inflation sets in. The other people who are screwed are Germans and brits who have a vacation home valued in drachmas with a mortgage in euros, by a non Greek (i.e. non S.A.) bank.
    Nanon – totally agree, No politician, greek or otherwise, has the political juice to push through the austerity measures being suggested. It’s too much of an economic and social shift, however right or necessary it may be.
    I think it’s political genius for g-pap (original Greek?) to call a referendum. It limits his political downside while simultaneously giving him an out from Nick and Angela.
    And ultimately, however lazy and misguidedly socialist they may be, it’s those voters that put him in office, and to which he is ultimately accountable.


  12. “[billyballs] think[s] it’s political genius for g-pap (original Greek?) to call a referendum.”
    Um, odds are that g-pap is going to be bounced from office before any referendum takes place. Further it is likely that no referendum will in fact ever be held. I hardly call suggesting something that ends up costing you your job and then never ends up happening “political genius”.

  13. Riddle me this, A.T. and Rillion: if the current Greek govt implodes and new elections are called, why do you think the newly-installed government is going to have MORE motivation to impose continuing austerity measures in exchange for that sixth tranche of bail out money?
    From the Times on 11-Sep-2011, Returning Greece to the Drachma:

    The standard of living reached in Greece since it joined the European Union means austerity will be inadequate to rebalance the economy. Returning Greece’s currency to the drachma, on the other hand, would allow market forces to set the country’s wage levels, induce other indebted European Union members to reform without Continental prodding and thus solidify the euro…Civic unrest shows further belt-tightening could produce political reactions deeply damaging to Greece’s future. Assuming further subsidies from European Union taxpayers are politically unlikely, a Greek replacement of the euro by a new drachma seems to be the only alternative.

    And as johnny implies above, once you have one member leaving the eurozone, then the dominoes start to fall, Italy and perhaps Spain are next and then the Euro itself goes belly up shortly thereafter.
    All of this assumes that the other Eurozone members won’t put up lots more money for bail outs, and that includes the creation of Eurobonds.

  14. From what I heard last night, current polling indicates the majority of Greeks want to remain part of the Euro rather then go to a new Drachma. I read the entire opinion piece you link and feel the author downplays the negative impacts of leaving the Euro on Greece. For example things like:
    “With these restrictions, conversion could require a bank holiday no longer than the eight-day period the United States imposed in 1933.”
    Oh, so no big deal, it would only require a bank holiday that hasn’t been seen in almost 80 years.

  15. Rillion –
    G Pap is already HNIC, his career is essentially complete.
    What office office would you suggest he aspires to?
    I do not believe this was a bluff on his part to call for a Eurobond issuance.
    The man needed an exit strategy.
    The existing government may disintegrate around him, he won’t be “bounced”. Whether or not that happens before or after the referendum is moot; the referendum will not pass.
    While the majority of greeks want to remain in the EU, they are also confronted with the mathematical reality that it is if not impossible, very difficult to do so.

  16. The implications of an exit of Greece from the Euro are mind boggling.
    – It won’t be an overnight conversion. It took many months to go one way. Reverting will be much much harder since people will know they have no interest in converting to a Drachma bound to depreciate. Even if the rate is pegged for 3 or 6 months for instance, people will not convert willingly.
    – Printing and distributing a brand new currency will not be an easy task. Plus this won’t be a secret, meaning people will know the change is coming and this will cause all sorts of issues.
    – If people know their Euros will be converted into lesser Drachmas, some will mass transfer it to foreign depositors, probably doing “currency tourism”.
    – An alternative will be cash hoarding, done either massively or little by little if the authorities decide to curb bank cash outs. There could be bank runs. That will not be pretty.
    – Banks across Europe will have to forbid Greeks from opening an account in their branches. This will require a great deal of legislation and closing of all sorts of loopholes.
    – If Europe effectively manages to prevent the Greeks from sheltering their Euros in non-Greek Euroland, Greeks will have to resort to storing their values in all sorts of commodities. Cars, boats, gold, silver, oil barrels, cattle, real estate, etc…
    – The government will do whatever it can to stop this and create more and more restrictions on travel, purchasing of property, etc…
    This will not be an overnight deal. More like a very messy untangling. Plus it has never been done. Most currency phase-outs are done on sovereign currency. When countries had to be pegged to the USD then reverted to a sovereign one it was done AFTER the crisis has been resolved.

  17. Polling may indeed indicate that “the majority of Greeks want to remain part of the Euro rather then go to a new Drachma”, but of course there’s a sizeable portion of the population that out in the streets right now protesting and opposing the austerity measures that were put in place to assure that Greece remains part of the Euro. And those measures are only going to increase and make things worse in the short and medium terms.
    Perhaps those people opposed to the austerity measures aren’t part of the electorate and therefore the referendum will pass, but I wouldn’t bet on it.
    From Nouriel Roubini’s Op-Ed published Sep 22nd, Full Analysis: Greece Should Default and Abandon the Euro, fourth bullet point n the lede:

    Default and exit will be painful and costly, but the alternative of a decade-long deflation and depression would be much worse, economically, financially and socially.

    As they say in the blogosphere, go read the whole thing. But he addresses one of the objections raised by lol above in a later ‘graph, The Effect of an Exit on Wealth:

    The same logic applies to the argument that the exit of Greece from the EZ will suddenly reduce the real value of the euro-denominated wealth of Greece’s residents…So, it is wrong to argue–as many do–that a [EuroZone] exit and the conversion of euro assets into drachma ones will sharply depreciate the real euro value of such assets and wealth. That reduction in their real euro value of wealth will occur even if exit doesn’t take place and a painful deflation does the dirty job. At least in the case of exit Greece can reduce the negative impact on its foreign net worth (assets minus liabilities) via a conversion of euro liabilities into drachma liabilities. Such a capital levy on Greece’s foreign creditors–given the unsustainability of Greek public and private debts–makes Greece better off (wealth-wise) in the exit scenario than in the no exit and deflation scenario. So, Greece is, at worst, as well off (or as worse off) in the exit scenario compared with the deflation scenario; or, more likely after debt reduction, it would be better off under the exit scenario.

    In summary, the arguments that Greece’s real GDP and wealth will be much worse in the exit scenario than the deflation scenario are utterly flawed. Quite the reverse is true: By restoring growth right away, rather than being stuck in a decade-long depression, Greece’s real income and wealth is eventually higher in the exit scenario.

    But I think as far as nuts-and-bolts of the switch go, lol is right that it’s going to be messy. But what’s going on right now is also messy and going to get a whole lot messier.
    The point about what went on with (presumably Argentina’s) pegs to the dollar being different are well taken. The “resolution” to the crisis in this case, if I understand the arguments of both of the aforementioned authors correctly, would be an orderly default on the existing debt.

  18. No question they should go the Islandic route.
    But beware of unintended consequences. There are so many moving parts that no-one can predict the effects this will have on the country as a whole.
    A lot of unknowns out there, and don’t forget this country has a history of communist dissent as well as its fascist counterpart. Put people in an unacceptable situation long enough and extremism can take over for many many reasons.
    For instance some Greeks have a growing issue with illegals (they hate their arch-enemy Turks already, throw more regional muslims at them and see what reaction you’re getting). The euro block has been pressuring the Greeks not to treat them too harshly but how long will it last after a euro divorce.
    Disconnected from the Euro block, with very strong resentment against any perceived injustice, illegal immigration will be seen as a plague imposed from the rich northern countries. Racism and xenophobia will surge more than what it is today and surprise everyone.

  19. Here’s the thing. If you let Viet Nam fall to the communists, the other countries of the region will fall like dominoes.
    What? It didn’t work out that way. Oh well, I guess I got to give lots and lots of money to my friends who sell military supplies.
    OK, so that didn’t work out so well, but here’s a better one. If you let one of the banks fail, the other banks and then the economy itself will fall like dominoes.
    What? It didn’t work out that way when Lehman failed? In fact, the losses weren’t really all that great, but oh well, I got to give lots and lots of money to my friends the bankers.
    Which brings me to my current point. We shouldn’t let Greece default because nobody knows what the effects will be and other components of the economy will fall like dominoes.
    What everyone forgets is that the other components react to the shock and dampen its effects. There are no dominoes, just politicians who use them to manipulate you into allowing them to shovel money to their friends. Greece can fall. The economy will deal with it. It won’t be pleasant but all of the components of the economy will dampen the shock. People will spend less, businesses will cut jobs, but in the end it won’t be horrible.
    Kick the can to avoid the dominoes DOES prevent the effects of a lot of problems from being felt, but only for awhile. Mostly, what it does is hide the money shoveling.

  20. billballs: “What office office would you suggest he aspires to?”
    Um, I find no where in this thread where I suggest he aspires to a higher office. I simply disagreed with your contention that his suggestion of a ref was “political genius”. I stated that the ref was unlikely to happen (and lo and behold its already been canceled!) and it was (“Two officials close to Papandreou said Thursday the referendum idea has now been scrapped, after the debt deal won some support from the opposition”). If he remains PM will be determined Friday night.
    billyballs: “the referendum will not pass”
    Rillion: “it is likely that no referendum will in fact ever be held”

  21. Tipster, now your Vietnam analogy works a little bit in the general, say if x happens then y will happen, but your analogy with Lehman doesn’t.
    Lehman was allowed to go under, the government used all that money not to try to save Lehman but to prevent its fall from taking anyone else down with it. It would be like rather then fighting to prevent Vietnam from falling to the communists, we used all the money and military to build a wall around it so that when it fell it couldn’t then take down any of its neighbors.
    So instead of if x happens then y will happen so we need to prevent x from happening, it was more, well if x happens and we do z, then we can prevent y from happening. In scenerio 1 (Vietnam) you work to prevent x from happening (only to find out when you fail and x happens that y doesn’t automatically happen), while in scenerio 2, x is allowed to happen but you spend all your energy preventing y from happening. So you can’t say that see, y didn’t happen because of x, because the real question is “if we hadn’t of done z after x happened, would y have happened?”, and the answer to that question is unknownable.
    TARP and all the bailouts were not done to save Lehman in order to prevent the collapse of the system, but to prevent the collapse of the financial system after Lehman was allowed to fail. Would the system have collapsed without TARP and all the other Fed actions? Ultimately unknowable.

  22. Sarkozy said he’d not release the upcoming $8B tranche because of the uncertainty. Greece had no way to finance its pensions or government pay long.
    Governments saved the banks. Again. The taxpayers will be shafted. Again.

  23. lol, I agree that throughout the U.S. and much of the world, taxpayers have been shafted to support the banks. However, in Greece, where people simply do not pay their taxes, I don’t think that particular complaint applies.

  24. Well, China said they weren’t willing to participate in the original deal, so I think we’re back to the “if only we get a lot more money from someone really stupid, this will work, at least for a while” plan, that as you may recall, no one really believed, so I’m not sure what effect this really has.

  25. A.T.
    1 – Greeks pay taxes. Just not as much as they should be paying.
    2 – I did not mention which taxpayer would be shafted. In that case the European taxpayers will be on the hook.
    Greece could have defaulted, bond holders would have suffered the “risk” part of the “risk/reward” tenet of capitalism. Of course some banks would have suffered as well. It’s a debt crunch, and it has to be unraveled by the unvoluntary destruction of the fake wealth that came with reskless credit.
    Instead, we have yet another tranche of taxpayer blood being drawn, or more precisely future taxpayer blood. For now governments are still stuck in the illusion that “tax cuts will bring more tax revenues” that Reagan sold us so cleverly 30 years ago and that has proven wrong again and again. One day we’ll have to raise taxes, there’s no way around that.

  26. * – Get a sense of humor and grow a pair big enough to select a moniker worthy of my therapy inducing ad hominus fury. You’re out of your league.
    lol – tax evasion – particularly income, property, and estate – is the Greek national pastime.
    rillion – I stand corrected; the referendum will not happen.
    I hope you would agree, however, that it’s interesting that the opposition party came so immediately into line with the reform package/austerity measure after the referendum was proposed.
    I still stand by my original comment – political genius. Let me expand my position:
    The referendum was a pyrrhic option. It is my opinion that a referendum to continue austerity or default outright would likely win the support of the Greek people.
    Consequentially, Greece would (most likely) be expelled from the EU by the rest of the member nations.
    Nothing would please me more than to be wrong; it would demonstrate a dramatic shift to the right for Greece, and would be a sign that they wanted to move towards a modern economy. I’m cynical, however.
    It would be ironic if Greece was allowed to have a Lehman moment; such as if a Eurobunde program developed to save Italy, or Spain.
    1) By offering to put the continued austerity, (and associated consequentially inevitable default) to a referendum; g-pap made two confrontations:
    a) (unless they were in on it from the start) forced Angela and Nick to at least consider politcally endorsing a larger EuroBunde resolution. This shifts some of the political and economic cost to their constituency.
    “When you borrow enough money; eventually you own the bank” – not certain who to attribute this to.
    It is my position that they are unwilling to propose such a hugely unpopular policy to their constituency.
    Also dovetails nicely with shutting of the taps almost immediately after the referendum announcement.
    b) Simultaneously, engaged the Greek opposition party (New Democracy) to either work with his current administration on a solution, or take the blame for forcing new elections and their associated consequences.
    c) now – evaluate his position. They are no worse off than prior to the referendum announcement; same deal and austerity on the table.
    But all of a sudden; his internal elected opposition is either silenced, or falling into line. Granted people are still in the streets, but we’ve got people in Oakland, too.
    It is likely, based on the fact that this lasted all of 24 hours, that this referendum was a bluff. Who knows, maybe the other EU leaders were in on it.
    You’ve got to be a good poker player to pull off a bluff.
    I stand by my original position – political genius.
    In his own words:
    “We had a dilemma: consensus or a referendum,” he said following meetings with his Cabinet on Thursday. “Failure to back the package would mean the beginning of our departure from the euro. But if we have consensus, then we don’t need a referendum.”

  27. If anyone cares, the latest is: Papandreou survived today but most likely won’t survive tomorrow. Today between 3:50am our time and about 5:30am was ridiciculous– Pap resigned, no that’s denied, yes he’s out, no he’s in, etc etc. The big news was that secession was discussed openly for the first time by Merkel (I’ve unfortunately had to spend a lot of time on this– legally, there is actually not a way to kick anyone out of the euro).
    So Greece’s bluff was being called because they said that a) the Tranche 6 8B euro payement was going to be withheld (now the date when greece runs out of cash has been moved to dec 15th according to FinMin Venizelos), and b) a “no” to the referendum was tantamount to not being in the EU anymore. Regardless, the referendum cannot happen. Despite a lot of headlines saying it was officially cxl’ed, it isn’t quite offical– the wording of some of those announcements was very particular. But in a practical sense, yes, the dec 4 referendum is dead.
    Papandreou seems a bit crazy and erratic with this, but . . .there is a minority school of thought saying he is actually smart and while this was poor international politics, it was good domestic politics. To play devil’s advocate and go along with the notion that Papandreou might have a clue– by forcing the referendum issue, he’s forced his opposition go come out and say that Pap is crazy and there’s no way they can risk a “no” on the referendum. He basically garnered more support for the austerity measures in doing so.
    Greece can’t have a disorderly default yet because of the risk in other countries. Buying time might seem like kicking the can down the road but it allows time for the new EFSF to be up to speed, banks to meet new Tier 1 cap ratio requirements etc.
    For Greece itself, Nouriel can write whatever he wants and it makes good copy, but the transition would be brutal and take a long time. Greek borrowing costs would soar and try buying any imported goods with where the drachma would be valued.
    More of this soap opera tomorrow . . .

  28. Just for the record, G-Pap did survive the confidence vote in Parliament early Saturday:

    Papandreou’s narrow win, on a 153-145 vote, capped a roller-coaster week that saw him wreak international havoc by calling a referendum on that same bailout plan, a move he later retracted under heavy pressure at home and abroad…
    Papandreou’s victory in Parliament was something of a Pyrrhic one. To secure it, he was forced by his own Socialist party to agree that he would step aside if need be to pave the way for a government of national unity. The opposition New Democracy party has insisted that it will not participate in a bipartisan administration if Papandreou remains in power.

    So even if he survived in the immediate term, it’s clear that he’s on his way out.
    Above, BillyBalls wrote:

    G Pap is already HNIC, his career is essentially complete.
    What office office would you suggest he aspires to?

    Just a coincidence, but blogger Matthew Yglesias posits a hypothetical answer to this question; a Prime Minister leaving a national government can extend their career by joining The Global Ruling Class:

    …in the era of globalization and EU-ification, I think the leaders of small countries are actually in a somewhat different situation. If you leave office held in high esteem by the Davos set, there are any number of European Commission or IMF or whatnot gigs that you might be eligible for even if you’re absolutely despised by your fellow countrymen. Indeed, in some ways being absolutely despised would be a plus. The ultimate demonstration of solidarity to the “international community” would be to do what the international community wants even in the face of massive resistance from your domestic political constituency.

    Not saying that there’s any obvious indication that this is in fact what G-pap is aiming for, but its an interesting perspective. Not that she had to do anything with the 10-year French OAT/German bund yield spread widening recently, but Christine Lagarde pulled the “joining the ruling class” part of this strategy off after leaving the French government.

  29. Billyballs – It looks like a split decision, upon further review I agree that it appears to have been a some good maneuvering on his part, he got the opposition to buy into the austerity measures and has forced them have some ownership of the issue (even joining a unity government). So I’ll grant you the political genius part. But I was right that the referendum would never happen and that it would likely cost him his job.

Leave a Reply

Your email address will not be published. Required fields are marked *