Greek Debt

Breaking from:

Financial Times Deutschland

The text is in a distinct Frankfurt dialect – and I don’t mean sausage – and Financial Times Deutschland is often worth a bit of attention.

86% of the creditors – i.e. far more than the necessary 75% – have responded and (not surprisingly) the majority positively to a substantial “haircut”. How substantial is a moot question, as the securities the investors get in exchange for their “lottery-ticket” Greek sovereign bonds have very generous terms – and as such rather low stock-exchange value.

A problem was that sovereign bonds under Greek law had no Collective Action Clause (CAC) whereby any reduction in debt would require anything but unanimity among creditors. That minor oversight was corrected a fortnight ago and retroactively instated. This means that the Greek government can now force the unwilling creditors to accept an offer they can’t refuse.

The sovereign bonds under non-Greek law with CAC will have to wait until the March 23rd to see if they can muster a blocking vote.

The International Swaps and Derivatives Association will meet today to discuss whether the Greek invocation of the CAC will constitute a default – in which case the Credit Default Swap (CDS) insurance will be forced to pay up. If it does not constitute a “credit event” – but is considered a “voluntary” action – the CDS isn’t concerned.
To add still more levity to the finance farce the total amount in CDS is about 70 bio. USD; but as the banks are both buyers and sellers of CDS the net flow is only about 3.2 bio. USD.

The proposition to the banks and other investors is: Either the banks lose the money because they love it – or the banks lose the money because they have guaranteed themselves they would not lose money.

How many clowns can enter a golf cart and keep the silly grin painted on the face?

This will of course poison the market for Greek sovereign bonds for a great many years to come. That is exactly the point! All loans will come through the other countries in the Euro-zone and they will only be doled out under the strictest supervision of inspectors of a particularly humourless disposition.