Saturday, 21 July 2018

Simply in the wrong club

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  • Peters 475px June 2014

Peters: In the eurozone, it’s all about the execution.

There are lies, darned lies and facts about what a Grexit might cause or what its avoidance might prevent. It now seems as though the game of brinkmanship is about to be lost by both sides.

The eurozone retains a member which is structurally not up to being part of the single currency and Greece gets to retain the euro which is far too strong for its economy and which will continue to strangle it and the prospects for its struggling population. What it does retain, however, is its full membership of the EU and therefore the unfettered ability of its best and brightest to continue to pack their bags and to go to work elsewhere in Europe without let or hindrance.

I was sent a piece yesterday by one Marc Chandler (sadly, the party sending me the text didn’t tell me which Marc Chandler) which argued that it wasn’t Greece’s fault that it was in the position it is in but Germany’s, that Greece hasn’t let the rest down but that the rest have let it down, and that Athens has delivered on all its promises but is not being rewarded for doing so.

His key contention is ” Greece’s debt is not a moral issue. It is primarily a political issue. The issues cannot be resolved at the finance minister level (Eurogroup). It requires the heads of state.” And who’s money, sir, are these heads of state playing with?

Mr Chandler very neatly forgets the level of wilful and cynical fraud and the systematic doctoring of economic performance figures which Athens perpetrated against its trusting partners as it wormed itself into the euro. Successive governments of the right and the left, one as corrupt as the other, created for themselves and their people levels of expectations which they never had the right nor the financial capacity to do and now, long, long after the chickens have come home to roost they are crying “Foul!”

I wrote on Monday: “I suppose my conclusion has to be that Greece is, for better or for worse, a member of the wrong club. That makes neither Greece, nor the club, wrong of themselves but there is a misalliance. Prolonging the misery will help neither.” Although it already felt then, and still does, as if an agreement would and will be reached – nothing has of course been signed yet – any moral victory will remain just that and nothing more.

When will euro-enthusiasts (of the single currency variety) grasp that euro-sceptics (also of the currency variety) don’t disagree with the concept of the currency union but question the planning and the execution of the project when devoid of fiscal union, long acknowledged as a necessary but absent precondition for its success.

On the other hand, even sceptics will have to admit that the European Union’s long history of burying its mistakes under reams of supplementary legislation hasn’t worked all that badly and that it might, if lucky, be able to spin Greece along for years to come. Debt forgiveness will happen in time but surely not under the bright flood-lights which are currently illuminating the playing field. The eurozone taxpayer has once again have been plucked, trussed and stuffed while being told of a great victory. Hey-ho; move on now, there’s nothing more to see.

Tiers of confusion

Meanwhile, ABN AMRO launched a highly successful subordinated debt deal yesterday. €1.5 billion of a 10-year, non-call 5 with a book of reputedly over €8 billion. It was billed as a Tier 2 transaction. I’ve been around for a long time now but I grew up with Lower Tier 2 which has non-deferrable coupons and Upper Tier 2 with cumulative deferrable coupons. What, I wondered, not having looked at this part of the capital structure for a while, was the difference between the classical Upper and Lower Tier 2 subs and the new Tier 2. I’ve seen a few of these Tier 2s around but had so far not looked too closely.

I duly called a few contacts in the market – they were very much of the kind one would expect to have the answer – but I drew something of a blank. None of them seemed completely clear as to what the risks on these bonds are. During the crisis, Tier 2 was announced to be dead but it seems as though, through the CoCo market, banks have beefed up their newly risk-sharing parts of the capital structure enough to be able to take down lower risk sub-debt again.

The issue spread of mid-swaps+235 bp to the 5-year call reflects that the risks on the asset class are not negligible but as at this morning they are around 12bp tighter. With much of the AT1 issuance done, there is bound to be much more of this Tier 2 in the pipeline and surely we’ll have sub-200 bps issuance before long.

CoCos come in all manner of forms with each one of the issues tailored to the precise needs of the borrower. There is no generic documentation and the triggers can be very different. Investors have grasped this even though index builders would still love to genericise the product.

ABN AMRO as had a great deal but I think a very careful read of the prospectus might be called for now. That goes also for any new Tier 2 bonds which will surely soon be popping up on the horizon like rabbits in the morning sun.

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