The arithmetic gets better and better

Over at WSJ marketbeat, they report on Goldman Sachs' latest thinking re the Greek restructuring. They seem to have concluded that the proposed 50% haircut is not enough to return Greece to debt sustainability:

In our view the key problem lies with the structure of the PSI itself, namely the insistence on a 50% reduction in face value for bond holders. From an investor’s perspective, a 50% haircut reduces both the final payment but also the coupon payment. Thus the impact on the NPV of the bond is much larger than 50%. The voluntary nature of the deal assumes some incentive for investors. Thus, the IIF have suggested an increase in coupons for the new bonds in order for investors to be compensated in terms of cash flows at least.

 The problem, of course, would be that this by itself undermines sustainability -- higher coupon payments mean bigger deficits. As GS points out, what Greece needs is the exact opposite: lower coupon payments right now, so that the worst of austerity can be undone. Once growth resumes, and interest rates fall a bit, sustainability will look a lot better quite quickly. I guess there is something not altogether great about thinking up restructuring rules as a fly-by-night operation between a handful of overwrought, half-numerate politicos... 

Is Merkel Putting Her Money Where Her Mouth is?

I just gave an interview about the Greek debt situation to Swiss Radio. No idea when they will broadcast it, but one of the things I suggested is that, if Mrs Merkel (and Mr Sarkozy, et al) really think that Greek debt is suffering from a "speculative attack", they should use their own money to buy Greek bonds. This would serve as a public vote of confidence, and she should make money hand-over-fist if her reasoning is right. Greece's 2040 bond is still trading at only 77 cents on the dollar in Berlin, Frankfurt, Munich, Stuttgart. If one really believes that the decline from 100 in mid-2007 is simply "speculation", then a buy-and-hold investor should salivate at the 6.3% return promised. If Merkel and friends are right, that'll be risk-free, if you hold the bond till 2040. On top, you get the upside of the bond rising back to where it should be (if you believe it is worth more than 77) sometime before 2040. Why do I like this impractical idea? First, it shows that Greek's travails have nothing to do with speculation. Problems with incentives in financial markets are plentiful, but this particular episode has nothing to do with a bear attack. Second, once Mrs Merkel and friends own tons of Greek debt, they cannot possibly use taxpayer funds for a bailout...