BarroMetrics Views: The Greek Re-Structure
A received a number of queries and decided the best place to answer them is here.
The questions can be categorised into two main groups:
- What are the terms of the restructure and bailout?
- What are the consequences of investors’ not accepting the restructure?
There are two groups of investors:
- Those whose bonds are governed by Greek Law
- Those governed by International Law (mainly ‘foreign hedge funds’)
The terms of the restructure were that the present bond holders would take a 54.5% haircut for new bonds and cash payment that would be issued under English Law and losses, if any, shared by the Eurozone governments.
The Greek Government needs a 95% participation rate to get Greece to 120.5% of debt levels by 2020. This is the objective set by the EU and IMF for the second bailout.
To ensure participation, Greece passed a retrospective law (CACs – collective action clauses) which would allow the Greek Government to force a deal if:
- 50% of local bondholders agreed to participate and
- And 66.67% (of the 50%) agreed to the deal.
As of last night (HK time), Greece has the 50%. It is probable it will get the 66.67% and invoke the CACs.(But note: invoking the CACs may trigger the credit swaps insurance).
Foreign Bond Holders
Greece has told the this group that it will stop payment if they don’t agree. Now, here is the fly in the ointment:
- This group totals 14%. So, to get the 95%, they must come on board.
- If they refuse, this will probably trigger the credit swaps default insurance. In this case, the foreign bond holders will take much less a haircut.
Effect if Default Triggered
I would be surprises if we see a repeat of Tuesday’s sell off – at least immediately. However the default will trigger the next crisis in Italy and Spain and at that would send the S&P tumbling.
So, how likely is it the Foreign Bond Holders would refuse. In my view, as certain as I can be when in comes to trading. They have little to lose (provided the ISDA agrees a default has been triggered) and much to gain.
In any event, today’s result scheduled for 9:00 PM (ECT) [4:00 am HK time; 3:00 PM EST] will only tell us if the Greek Government has had to invoke the CACs to get closer to the 95%. The foreign bond holders still have some time to decide beyond tonight. Let’s see what happens….