June 19, 2011

Modest IMF Proposal to Solve the Greek Debt Crisis: Introducing HABS

This plan, written by an IMF staffer responsible for scheduling evening social entertainment for Dominique Strauss-Kahn, recently fell into my hands:

To: Jean-Claude Trichet, George Papandreou, maidman@imf.org
Cc: ben-contained@federalreserve.gov, godswork@goldmansachs.com
From: [Redacted], IMF Undersecretary for Married Executive Affairs
Subject: Modest Proposal to Resolve Greek Debt Crisis Using Novel Asset-Backed Security
Date: May 12, 2011
Dear Gentlemen:
The ECB has declared that Greek debt restructuring is "off the table".  As negotiators in Europe struggle with an intractable foe in the Greek debt crisis standoff--mathematics--I believe that there is an unconventional option, that has heretofore not been considered, that may be the only way to keep senior creditors whole.  Which is, after all, the primary directive of modern Western governments.  At the same time, we may be able to get these same creditors to accept impairments, which is the key to achieving political compromise.  Let me elaborate further on how to achieve these seemingly contradictory goals.
The Greek debt to foreigners outstanding amounts to some $481.5 billion dollars.  Most of this debt was created by European financial institutions such as Commerzbank, BNP Paribas, Hypo Real Estate Holding AG, Société Générale, and Crédit Agricole.  US financial institutions are rumored to be on the hook for credit default swaps written against this debt.  Nobody really knows the exposure distribution because BIS keeps that secret.
It turns out that history gives us some guidance in this policy matter.  When Roman tax burdens, debts, and inflation got to a certain point, the middle class sold themselves into slavery to wealthy patricians in order to get relief from bill collectors who wielded unlimited powers to terrorize.  In the 17th century, a more humane institution was introduced, that I am proposing to resurrect with some modern enhancements: indentured servitude.  This admittedly unconventional measure will present creditors with a bond swap deal that is too good to refuse.
Here is the heart of my proposal.  There are approximately 6.6 million men and women of working age in Greece.  Each of the able-bodied will be pooled into Human Asset-Backed Securities (HABS) as indentured servants.  The HABS trust collateral assignments will be enforced by the Greek government (i.e. military), and trust administration will be contracted to a qualified financial advisory firm (you reading this, Lloyd?).  The trusts will then grant shares to creditors in proportion to the debt owed, in exchange for outstanding conventional debt dollar-for-dollar.  These citizens will then be be assigned work by the financial institutions, for example in portfolio companies owned by the institutions' private equity divisions.  They may also be used in trading desks to buy US Treasuries and flip them to the Fed, make buy-side recommendations on whatever the sell-side needs to unload, buy up commodities and store them on leased ships anchored in international waters, etc.  The point is these potential Greek servants are very versatile and represent an undervalued asset both to the Greek government and to European financial institutions.  Average Greek worker productivity is twenty dollars per hour or about $40,000 per year, so the financial institutions should be able to get plenty of value out of the servants.

Each former Greek citizen will be allocated a subsistence wage of $11,500 per year to pay for the cost of living (the income poverty line in Greece is about $8,000/year, so this plan will have the bonus social benefit of ending poverty in Greece).  In exchange, Greek citizens will be generously granted by senior creditors a $15,000/year impairment towards the existing debt balance.  Let us not call this an austerity program; it is highly progressive and technically will lift the Greek masses out of poverty.
Table 1: Annual Cash Flow Model For Greek Indentured Servant
Avg Greek Worker Annual Productivity $40,000
Annual Subsistence Wage $11,500
Annual Impairment $15,000
Retained Productivity Per Worker $29,500

As you can see, the yield on these human assets is very attractive as long as they are performing, and the subsistence wage can potentially be garnished as a form.of credit enhancement to the security.  The productivity value margin is more than 2.5x the impairment credit, and using the same risk models used to predict default rates in CDO^2 deals a few years ago we have calculated that the risk of loss to senior creditors is less likely than the US Congress passing a law to demolish K Street and turn it into a national monument dedicated to the fight against government corruption.
Let us now turn to the debt retirement schedule. We should set a goal of repaying the debt within seven years, which is currently the average maturity of Greek debt, because we don't want to inflict any duration mismatch headaches upon our esteemed financial institutions. With 6.6 million Greek indentured servants being granted $15,000 in impairment credit in exchange for their labor, a total of $99 billion dollars per year in debt will be retired as impairment.  Within seven years, the debt will be entirely extinguished according to this schedule:
Table 2: Greek Debt Repayment Schedule (in Millions)
Schedule ItemYear 1Year 2Year 3Year 4Year 5Year 6Year 7
Debt Balance$481,500$405,612$326,081$242,733$155,384$63,842$(32,092)
Interest (@4.8% Avg Coupon)$23,112 $19,469 $15,651$11,651$7,458$3,064$(1,540)
Annual Impairment$99,000$99,000$99,000$99,000$99,000$99,000$99,000

At the end of seven years, the Greek balance sheet will be spotlessly clean, and the Greek human assets can roll off of the HABS, once again free to rack up massive debts while drinking Ouzo.  Whenever the Greek government needs to borrow again, a new HABS structure can be created and citizens rolled back into it.
Since the creditors will eagerly sign up for this plan (once-in-a-lifetime opportunity to grab some yield), no credit event need be triggered, so all of the CDS writers can rest easy.  The latter may now have the opportunity to write life insurance policies against Greek servants with their owning financial institutions as beneficiaries.  One could use Greek underwriters and now it's a job program to improve the Greek government's popularity.  The synergies are self-reinforcing.
The key innovation in this plan is to barter Greek citizens' liberty and labor in exchange for credit impairment concessions on behalf of senior creditors.  This is a win-win for all parties: the Greeks gain a novel way to pay off their debts, the financial institutions receive compensation far in excess of their current yields in exchange for impairment on current assets, and the Greek government gains a whole new asset base against which to borrow.  If we can get the Papandreou government to agree to sell the public (literally), we may yet be able to head off the crisis. In the spirit of compromise, let everybody share in the sacrifice.
Q: The term "indentured servitude" has some negative connotations.  How do you propose to handle this?
A: I propose to substitute the term "Financial Freedom Contract" to emphasize the freedom the servant will feel when the debt is paid off in seven years.
Q: If all Greek working age adults are conscripted into indentured servitude, what will happen to the children and the elderly?
A: The children can be held in reserve and periodically sold to the black market to provide fixed income stability for the security trusts.  The elderly can be used to provide extra liquidity, perhaps for a Soylent Green-type secondary market.  Lord knows you can never have too much liquidity.  Perhaps this is something that Lloyd would be interested in making a market in?
Best regards,
PS Dom I think you'll like the service at the Sofitel, don't be shy about asking if you want anything.

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