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Greece rescue plan: The resurgence of structured finance?

The Greek rescue plan, suggested by a consortium of banks led by BNP Paribas, praises the techniques of structured finance, with this time the politicals’ blessing...

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Let’s remember the days where structured products, indexed to a variety of indices, packaged through opaque structures, the famous "SPV" (Special Purpose Vehicle), which led to "sneak" the tremendous growth of credit derivatives were criticized. Are these days behind us?

Let’s remember the days where Goldman Sachs was criticized for helping Greece raising billions of euros unrecognized by the supervisory authorities with a simple cross-currency swap. Are these days behind us?

Let’s remember the days where politicians of all stripes, spoke against the so-called structured finance, responsible for their view of all the ills of our economy.Are these days behind us?

Not sure! From France to Belgium however, via Germany and Italy, many policy makers have supported the solution proposed by BNP Paribas’ teams.

What is the new plan ? The deal can be broken down as follows:
- Out of 100 euros initially granted to Greece and whose reimbursement is made between 2011 and 2014, investors will receive 30 euros at initial loan’s maturity.
- They then reinvest over 30 years, 70 euros on Greece’s debt subject to interest of 5.5% plus a bonus coupon ranging form 0 to 2.5% depending on the evolution of Greek GDP (In the worst case, if Greek growth is negative or equals to zero, the bonus coupon will be zero; in the best case, with exceptional growth, the coupon will be 2.5%).
- However, over these 70 euros, only 49 euros will go directly into Greek state’s funds. Indeed, 30% of 70 euros, 21 euros, will be invested by the Greek state in a SPV (Special Purpose Vehicle). The vehicle itself will invest this amount over 30 years in a zero-coupon structure, made of a pool of high-quality AAA rated bonds (issued by signatures such as EFSF, EIB, Germany...) which will accumulate and repay interest at the term of 30 years. Based on a 5.50% rate, the amount due at maturity by the vehicle would be 70 euros. Thus, the SPV can guarantee full payment of the nominal of the 30-year loans purchased by investors. The structure will be managed by the European Central Bank, to serve as trustee.

The equation was complex to solve; if the coupon was too low, the rating agencies would have acknowledged Greece’s failure, considering that investors were forced to invest more, while if the coupon was too high, agencies would have considered that the degradation of the price paid by Greece justified its default on payment. The indexing on the Greek GDP is a real innovation, and appears as an adequate solution.

Moreover, these new bonds will be excluded from the trading books of banks. Finally, through some accounting arrangements, this "rollover" of the Greek debt should not have an excessive impact on European banks’ accounts, including those of the most exposed bank, BNP Paribas.

However, while this montage solves Greece’s liquidity issue on the short term, it does absolutely nothing to solve the solvency problem

Steve Tui , July 2011

Article also available in : English EN | français FR

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