Greece: No way out

Debtors accept Greek extortion,

default expectations fully intact

There is nothing even remotely resembling a "good deal" as described by the EU Commission for Greek bondholders, nor was the news of the agreement struck last night "extremely good news" as the Greek finance minister told the press. When adding up all the ingredients of the "bond swap" agreement, investment firms stand to lose on average 72% of their Greek engagements. That helps explain that Greece in de-facto default status, and is being shut out from the financial markets for up to 10 years now. Without further help from ECB and Eurogroup, Greece will go bust within six months.

The Greek government is now expected to trigger so-called “collective action clauses”, introduced into bonds in recent law, to impose the 53.5 per cent loss on all holders of bonds issued under Greek law. In order to use the CACs, Athens needed 66 per cent of participants to agree the deal; by getting close to 88%, the hurdle has been cleared safely.

Once CACs are triggered, all €177bn in Greek-law bonds will be swapped for a cash payment equal to 15 per cent of the old bond and new Greek bonds worth 31.5 per cent – wiping about €100bn from Athens’ €350bn debt pile.

In spite of the optimism around the deal today, I pick up on some interesting grey market trading that suggest financial markets are already betting Greece will default again in the future:

Grey market “when issued” pricing for the 20 new bonds were ranging from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes.
The pricing equates to a yield on the new bonds of 17 to 21 per cent, about where Greek yields stood in the autumn, and far worse than the yield on Portugal, which has also received a bailout.

The status of the 14 per cent of Greek debt not issued as Greek-law bonds, most of which are bonds governed by English law, remained unclear. According to a confidential analysis prepared for eurozone finance minsters last month, 95 per cent of all bondholders must be included in the debt restructuring for Greece debt to reach 120 per cent of economic output by 2020, the target of its new €130bn bailout.

Greece cannot reach that target with Greek-law bonds alone, and Athens may need to wait until a meeting of foreign-law bondholders at the end of the month to know how many will join the restructuring.