Sonntag, 31. März 2013
Eingestellt von rolf j. koch um 22:47
But Isn't Cyprus "Unique"?
Submitted by Tyler Durden on 03/30/2013 19:44 -0400
Via Citi's Matt King,
Cyprus’ significance was always going to stem more from the precedent it created than from its size. In choosing a relatively conventional good bank, bad bank model, the authorities have done much to alleviate the damage that would have been caused by an arbitrary tax on uninsured depositors. But the very “success” of the solution now being adopted seems likely to lead to its replication elsewhere. While good news for the sovereigns and for longer-term growth prospects, its negative repercussions for senior bank bondholders still seem far from being priced in.
So much for existing statutes
The Cyprus model has three key features, which highlight the effective elimination of many of bondholders’ supposed protections:
- Hasty implementation under national legislation: the rapid passage of new national laws effectively re-writes existing bankruptcy legislation, reducing bondholders’ rights in the process. Even if bonds have been issued under UK or US law, this emphasis on the bankruptcy regime itself effectively dilutes or negates many of their protections.
- Application to all bonds by statute: Cyprus again demonstrates that, when backed into a corner, the authorities are willing to impose losses by statute on all bonds, even at senior level. This contrasts with the previous official EU line of more or less waiting until 2018 to issue new, bail-inable senior bonds, with their bail-inability set in contract rather than established by statute.
- Extremely low recoveries: the decision to move bonds to the bad bank, together with uninsured depositors and equity, is likely to result in extremely large losses. Even if bonds are not actually converted outright into equity, as seems possible, the decision to protect not only insured deposits but also €9bn in ELA (both of which are going to what is effectively the good bank) is likely to result in near-zero recoveries.
But isn’t Cyprus “unique”?
Against this, of course, is the argument - noisily voiced by the authorities - that Cyprus is unique. We disagree. Yes, the Cypriot banking system was unusually large; yes, concerns over the Russian depositor base are unlikely to be a feature elsewhere; yes, losses for bondholders will likely be exacerbated by the unusually small proportion of the capital structure they represent (Figure 1).
But to us, the similarities with other countries are far stronger than the differences. First,almost all EU countries have banking systems that are outsized by global standards, and which might prove difficult to save if they got into difficulty (Figure 2). We see it as no coincidence that one of the chief advocates for senior bail-in to date has been the UK.
Second, the likelihood of low recoveries for bank bondholders in the event of restructurings is something we have been writing about since 2008. Even without the formal application of bail-in and creation of good and bad banks, the tendency towards covered bond issuance by weaker banks, and the growth in both private and public sector repo (ECB and ELA) has led to far greater asset encumbrance than used to be the case historically, particularly by the time any bank gets to the point of requiring resolution. Add in the removal of pari passu status with depositors, and there is very little left.
How many one-offs make a trend?
Investors still seem reluctant to assume that the precedents being set will be applicable elsewhere. Perhaps this makes sense — even at Bankia last Friday, senior was spared losses for now, and while sub debt suffered haircuts, it was not wiped out completely. But the very fact that the market has responded so positively makes us think the very next bailout requiring approval from Brussels is likely to see elements of a similar model being requested. The fact that it was creditors like Germany, not the European Commission, who were pushing for the good bank, bad bank solution in Cyprus (as opposed to a deposit tax) is telling in this regard. So too is Djisselboem’s statement today that the “Cyprus bank restructuring plan should be seen as a template for the rest of the Euro zone”.
The market seems to be coming around to this view, but is not completely there yet.
Eingestellt von rolf j. koch um 07:41
25 Lessons From The Cyprus 'Deal'
Submitted by Tyler Durden on 03/30/2013 15:10 -0400
There are many lessons and implications from the Cypriot crisis (we list 25 here). Among the most important is that conditionality is back, energetically, which is very important when considering the circumstances under which other, bigger, countries might access ESM or OMT. We believe, like BNP's James Mortimer-Lee, that the market has been too complacent, seeing OMT and “whatever it takes” as unconditional – that’s wrong. A second lesson is that a harsher line is being taken by the core. This partly reflects more effective firewalls, so that core countries are more willing to “burn” the private sector, where doing so does not represent a serious systemic risk. Cyprus may not be a template, but we have seen enough to glimpse what the new pan eurozone bank resolution system could look like. Risk for certain classes of stakeholders in banks has risen. We are a long way from seeing the eurozone crisis resolved.
Via Paul Mortimer-Lee, BNP Paribas,
There are many lessons to be learned from the Cyprus bailout, and plenty of implications for how things may develop in the future. We list 25 here, but there are more.
Lesson 1: Do not underestimate the ability of the eurozone to do the right thing – after all the alternatives are exhausted;Lesson 2: Eleventh hour deals can often lead to mistakes and have unintended consequences. The decision to haircut depositors under EUR 100k was a pothole the Troika fell into. It questioned the integrity of the EUR 100k deposit guarantee;Lesson 3: The disappearance of Mario Monti from the scene has reduced the influence the South has on decisions about the future of the euro;Lesson 4: There appears to be bailout fatigue in Germany, the Netherlands and Finland. Mrs Merkel is prepared to be tougher ahead of the election than many thought;Lesson 5: The new Chair of the Eurogroup, Mr Dijsselbloem, seems to be a hardliner compared with his predecessor, Mr Junker from Luxembourg;Lesson 6: Mr Dijsselbloem can sometimes be too outspoken and not sufficiently diplomatic. Beware future gaffes;Lesson 7: The ECB is prepared to use the ultimate weapon – “no more money for your banks”. This is not exactly ejecting a country from the eurozone, but would amount to making it very difficult for it to stay in;Lesson 8: Such a threat has profound political implications and is above even Draghi’s pay grade, so must have the backing of Mrs Merkel and others;Lesson 9: When a problem is not seen to be systemic, there will be reluctance in Germany and like-minded countries to use taxpayers’ money to solve it. Cost/benefit balancing will ensure each case really is “unique”;Lesson 10: This puts private interests at greater risk in absorbing the financial pain, or at least the first tranche of it, especially in small non-systemic countries;Lesson 11: “They” (the Troika) will seek to use private money where they can to limit the size of public sector involvement. While each case is unique, the principles are the same. In Greece, government bondholders took the pain; in Cyprus large depositors. Each case is “unique” but there may well be further “unique cases”, each different in its own special way;Lesson 12: When it comes to resolving banks’ difficulties there is a hierarchy of who will take the pain: shareholders first, then junior bondholders, then senior bondholders, then large depositors, then the state, then foreign taxpayers;Lesson 13: How much pain the private sector will take depends on whether or not a problem is seen as “systemic” or not. The less systemic it is, the more private interests will suffer;Lesson 14: Some countries see firewalls as adequate. So they are now prepared to “burn” stakeholders who were previously protected;Lesson 15: The probability of direct bank recapitalisation by the European Stability Mechanism (ESM) has gone down;Lesson 16: Moral hazard has been reduced;Lesson 17: We crossed a Rubicon of sorts when capital controls were introduced in Cyprus. A Cypriot bank euro is not freely exchangeable with German bank euro. The euro area became more fragmented;Lesson 18: It may be more difficult to remove capital controls than expected;Lesson 19: A precedent for the use of capital controls has been set that can speed up capital flight in a crisis, raising the probability of their subsequent re-use;Lesson 20: It would be surprising if larger depositors were not making defensive moves out of weak banks and banking systems. Watch the scale of ECB MROs and ELA operations;Lesson 21: The Cypriot economy will see a major recession;Lesson 22: The Cypriot programme will, consequently, prove to be too optimistic, there will have to be another;Lesson 23: While Draghi has bought time, the fundamental problems in the eurozone are a long way from being solved, and can come back to haunt markets;Lesson 24: Do not expect Russia to take the loss with a feeble protest – there will be consequences;Lesson 25: Conditionality is very important to the core countries. There is no such thing as a conditions-free bailout. There are no blank cheques and no free access to Outright Monetary Transactions (OMT) or ESM. There is no such thing as a free lunch (unless not having a free lunch threatens the system).
Eingestellt von rolf j. koch um 01:48
Samstag, 30. März 2013
Argentina’s desperate exchange proposal
By Felix Salmon
Argentina has done as the Second Circuit Court of Appeals ordered, and has now formally put forward its proposal for paying off Elliott Associates and the other bondholders suing it in New York court.
You could be excused for not entirely understanding what Argentina is proposing, in this 22-page filing: it’s not particularly easy to understand. But the upshot is simple, and pretty much as everybody expected: Argentina is offering to give Elliott pretty much exactly the same deal as it gave all the other holders of its defaulted bonds. In practice, that means that Elliott would swap into new Discount bonds with a present market value of roughly $120 million; if settling the case in that way helped Argentina’s bonds to rally back to where they were trading in October, then the market value would rise to about $176 million.
Argentina is at pains to point out that “this proposal is a voluntary option”: they’re not proposing that the court force Elliott to accept the deal. But at the same time, Argentina knows full well that the chances of Elliott voluntarily accepting this deal are exactly zero. Elliott is suing for a total of $720 million, and while it might be willing to settle at a modest discount to that sum, there’s no way it’s going to accept the same kind of 70% haircut that it has consistently rejected all along.
Indeed, it’s entirely improbable that any of the current plaintiffs, having rejected two previous exchange offers and having spent many millions of dollars in legal fees, would be remotely inclined to accept this offer were it put to them. Which makes it really hard for the court to accept this proposal as a good-faith attempt to pay the plaintiffs what they’re owed.
The court specifically asked Argentina how it was going to make current the obligations of theoriginal bonds; and/or how it might repay those original obligations going forwards. Argentina, in response, has proposed doing neither. Instead, it is proposing to give the plaintiffs the 70% haircut, on those original bonds, which they have consistently rejected.
The AP’s Michael Warren says that Argentina’s proposal is “creative”, but I don’t see much evidence of creativity here: instead, I see a lot of the failed rhetoric which helped bring Argentina to this fraught position in the first place. “Plaintiffs cannot use the pari passu clause,” writes Argentina’s lawyer, Jonathan Blackman, “to compel payment on terms better than those received by the vast majority of creditors who experienced precisely the same default as plaintiffs”. But of course they can do that, or at least they’re trying to, and so far, New York’s courts have ruled quite consistently that they have every right to do so.
There are signs of real desperation in Argentina’s filing: it spends a lot of time, for instance, talking about the price at which Elliott bought its debt, and the profit that Elliott would make if it got the full $720 million it’s asking for. It’s an incredibly weak argument: for one thing, there’s no law against making money in the markets, and for another, it ignores all the judgment debt that Elliott holds, and isn’t getting paid on, and isn’t litigating in this case.
Indeed, it’s far from obvious whether Argentina is extending this offer to judgment creditors, who make up the vast majority of the country’s holdouts. But one thing is clear: everything in this filing is entirely consistent with the behavior which has already been found to be “contumacious”. Argentina is a sovereign nation, and it’s staring down the court, here, daring it to go through with its dangerous plan. And frankly it’s very hard to imagine that at this point, because of this filing, the court is finally going to blink.
I’ve been largely sympathetic to Argentina’s position in this case all along, but in the wake of the various rulings which have already been handed down, Argentina doesn’t really have a legal leg to stand on any more. That’s why it’s resorting to desperate measures like saying that Elliott is going to make an unconscionable amount of money if it wins: where legal reasoning has failed, all that’s left is an attempt to bypass the law and attempt to scramble onto the moral high ground. The problem, of course, is that it’s really hard for the contumacious Argentines to occupy any kind of moral high ground at all, even when their opponent is a notorious vulture fund.
As far as I know, Argentina has not hired any kind of bankers to run this proposed exchange offer. Which is further evidence, if any were needed, that it will never see the light of day. You’ve heard of giving someone an offer they can’t refuse: this is an offer the plaintiffs can’t accept, and Argentina knows it. I find it extremely hard to believe that the New York courts, having come as far as they have, will consider it a remotely adequate remedy.
Eingestellt von rolf j. koch um 18:38