Bond swap plan is for Greece and Greece only, but it won’t be enough.

The FT just published a few details of the bond swap agreement in the new bailout for Greece. The swap agreement is only for Greece, and “All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature”.

The only interesting feature of the agreement is the voluntary exchange of bonds maturing before 2019 by 15 and 30 year bonds, paying 5.9 and 6.8%, as a compensation for the banks accepting a 21% “haircut” on the value of the existing bonds. IIF, the Banker’s designer of the plan, estimates a participation rate of 90%.

The Greek government will have to use the new funding to buy European AAA bonds to post as collateral for the new bonds. The cover ratio was not specified, but if it is close to one the “haircut” will be meaningless. Even at 50% and with a take up rate of 90% the effect of the effective haircut would be only “9.45%”.

As been amply demonstrated in last few years the Greek problem is not one of liquidity but of solvency. We and many other observers have estimated that to get out of insolvency Greece needs a debt pardon of about 50%.

All the other measures announced to support Greece are not enough to fill the gap between these 50% and the expected “haircut” of 9.45%. So, it is only a matter of time before Greece needs another bailout, probably as early as 2013.