9th March 2012
Today has opened with news on the debt swap for Greece and it has turned out pretty much as I expected. If we look at the official statement we see this:
'Of the approximately €177 billion of bonds issued by the Republic and governed by Greek law and subject to the invitations, the Republic has received tenders for exchange and consents from holders of approximately €152 billion face amount of bonds, representing 85.8% of the outstanding face amount of these bonds.'
Not quite the level we were promised by the hype and bombast was it? Indeed holders of 5.3% went to the trouble of replying and saying no, which was in effect saying up yours! In addition some 8.9% ignored the reply and accordingly as it has been an event almost impossible to miss can be assumed to have said no too.
The position on the bonds issued under foreign law (mostly English) and for state companies was even worse and was so bad at 69% that we saw this response:
'The Republic has decided to extend the invitation period in respect of each series of its bonds issued under laws other than Greek law and of bonds issued by state enterprises and guaranteed by the Republic until 9:00 p.m. (C.E.T.) on 23 March 2012.'
A bit like Irish referenda is it not? If you do not give the “right” answer the first time you get an opportunity to try again! The 69% acceptance rate does create a problem and there are sound reasons for many of the 31% to continue to say no which I will explain later.
Greece and her debt burden
Whilst the main stream media will no doubt talk of this being the largest default ever I think care is needed to look at such matters in real or inflation-adjusted terms. Also such talk implies this helps Greece substantially when it does not. If we take the 206 billion Euro debt and multiply it by 53.5% we get 110 billion Euros of relief, but I note official statements say 5 billion less so we are already losing ground! But there are substantial subtractions from this. For example the Greek banks were promised up to 50 billion Euros of help in the latest bailout package and there may have to be other help for Greek pension funds. As I have discussed many times there is relief for Greece but simply not enough to make a real difference to her prospects when she has a national debt of 363 billion Euros.
Greece will have to impose the default
As there were not enough voluntary acceptances ( I use the word voluntary very loosely here) then Greece will have to impose the default on the Greek law bonds via what are called Collective Action Clauses.
Will we see a default declared today and Credit Default Swaps paid out?
Possibly not? The committee which decides is called ISDA and it meets today at 1pm to decide what to do. However a delay may be caused by this in the Greek press release about the switch to a forced default via the use of law (Collective Action Clauses).
'…it intends to accept the consents received and amend the terms of all of its Greek law governed bonds,'
It says “intends” rather than has an accordingly ISDA could defer its decision again. There are other grounds on which it could declare a default (it’s possible that one of the bonds had a 100% acceptance rate) and indeed on logical grounds it should now declare a default but uncertainty remains.
Once it has we will find out who has written the Credit Default Swaps on Greek bonds as they declare their losses on them.
This will end up in court and investors may well win (eventually)
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