Friday, March 9, 2012

The latest on the Greek saga

As predicted, the PSI results have triggered a Credit Event. Greece is officially in default. Again, the reason for the big fuss (with some in the financial media completely confused) about the 85% vs. 95% yesterday is that 85% would have resulted in CACs while 95% would not have. That's because 95% would have given Greece enough of a debt reduction without the need for CAC.

The actual number ended up being 83.7% participation for all Greek bonds, 85.8% for Greek Law bonds and 69% for Foreign Law bonds. Here are the results.

Source: BNP Paribas

This afternoon the equity markets reacted negatively to the ISDA announcement that a Credit Event has indeed been triggered. Market's reaction is a bit surprising, given the trigger was fully expected. Some traders are still scared of the old Greek CDS bogeyman.

So what will happen to the holdouts? The 25bn of bonds under the Greek Law will be "CAC'ed" as the chart above shows. They will be forced to deliver their bonds in exchange for the shiny new Greek bonds. The 9bn holdouts of Foreign Law bonds will be looking for door # 4. Some will get "CAC'ed". Others will be able to form blocking positions (each bond will be treated separately).

In the case of a relatively small amount of Greek government guaranteed railway bonds (about 400 million euros issued by Hellenic Railways) there is a chance that bond holders will get paid more than what they would get via the PSI exchange. Here is a good write-up on why that is.

The other holdouts are taking a big chance, although they still have some time (Greece is extending the deadline for Foreign Law bonds tender until  March 23d.) Trying to take on Greece in a UK or a Swiss court is very risky and likely to backfire. Getting a 53.5% of face value haircut is better than getting 100% haircut - plus massive legal bills and years in court (as some have found out the hard way with Argentina). It's not a good idea for the simple reason that Greece simply doesn't have the money to pay them and is unlikely to do so (as it clearly stated again on Friday).

Greece will have a tough enough time just making the ECB whole. The ECB is holding Greek bonds with relatively short maturities (€4.6bn maturing this month alone) and is expecting to be paid par. With the ECB's seniority, Greece will have no money left (see the IFR article on the topic) to pay the holdouts. As the saying goes, "you can't squeeze blood from a stone". The sad fact remains however that unlike many corporate restructurings which are meant to turn the company around, the situation with Greece is grim even after the debt reduction.
IFR: sovereign restructuring adviser said that the situation remained unattractive for bondholders since Greece would remain in such a tough economic position with a heavy debt burden even after the deal cuts out €100bn of liabilities.

Normally, people tender into an improving situation because they see the debt burden will be reduced and the economy will recover,” he said. “But with Greece it’s very depressing. People tendering here have no option. And I can’t see a significant upside soon.”
And unlike Argentina who has natural resources and was able to rebuild its economy after the default plus a restructuring (although still has major issues), the future for Greece is quite bleak. The likelihood of another default (this time on the new, post-PSI bonds) and an eventual exit from the Eurozone remains high.

Greek unemployment rate (Bloomberg)
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