I’m putting up the entire Boom/Bust show in which Yanis Varoufakis appears, in part because the introductory section discusses how stressed oil producers may use secured lending to borrow more money in an effort to ride out the price bust. That would lead to a further drop in the price of any junk bonds or market value of any existing loans on those companies, since the new secured borrowing would be senior to the existing debt.
And why were lenders so dumb as to let that happen in the first place? One culprit is ZIRP and QE: that investors were so desperate for yield that they’d take any opportunity that offered an high enough interest rate premium. But the second is the power of private equity. Many of these loans were made in connection with private equity firm acquisitions of energy related firms (let’s put aside how loopy it is to lever up companies in highly cyclical industries). PE firms are the biggest single meal ticket for the investment banking side of major Wall Street firms. So to accommodate their pet wishes, the financial intermediaries weaken (or in many cases, eliminate) covenants, even when it is not in the interest of the bank itself. It’s yet another manifestation of bankers trading against their employers. Those PE financings have big fees, while the greater losses due to lax covenants show up later. It’s classic “IBG, YBG.”
As for the with Yanis Varoufakis segments, which begin at 4:00, as much as I support his and his compatriots’ efforts to get the clearly unsustainable Greek debt load reduced, I suspect readers will share my frustration with the approach Yanis is advocating. As much as Yanis is correct strategically, that a Grexit is a massive lose/lose for Greece and the Eurozone, you don’t give the store away in negotiations by saying that want to be reasonable and aren’t prepared to use your leverage. Mind you, Greece does not need to threaten a Grexit, in fact, since no exit mechanism is specified in the Maastrict treaty, it’s not clear they can get out of their own volition (but trust me, if Germany wants Greece out, I ams sure the legalities will be papered over somehow).
Greece’s best chance of getting concessions from the Troika sooner rather than later is to persuade Greece’s foreign paymasters that Greece has had it and is prepared to take extreme measures, namely, default. But the Germans are trying to influence the Greek elections with scare talk that they will force the Greeks out in that case, so as to scare Greek voters into voting in more moderate, as in compliant, representatives. Whether that strategy works remains to be seen. So Syriza may be prepared to be more aggressive if it gets solid backing from the voters on January 25. But I am concerned that they really believe they can reason with parties who’ve bullied nation after nation in their efforts to protect the banks and now their own political hides.