Greek Update. PSI, IMF, Finland

·            PSI conclusion on the 9^th Sep.

·            IMF leaves Greece to come back in 10 days.

·            Issue of collateral and security given to Finland

PSI

According to the schedule the PSI should be completed by the Friday the 9^th of Sep. The IIF and the Greek government has set a target of 90% of participation for the bond maturing up to and including July 2020 (81 bonds in total). Bond holders are invited to chose “voluntary” between 4 options ranging from 15Y to 30Y with some having capital guaranteed at maturity.

The problem is that this 90% participation seems to be hard to achieve and currently news reports suggest that so they have collected near to 50-70% with only 4 days remaining for the rest. The low participation is easily explained as a strategy to maximize profits. If a bondholder sees that the 90% has been reached there is no incentive for him to participate but to hold out and get paid Par. Thus everyone is waiting to see what the others are doing in order to make up his mind. In the end there are 3 scenarios:

·            The 90% is achieved and the rollover proceeds according to plan. Then we expect the Greek bonds maturing in the next few months to rally possibly near par. This is because what is left would be paid in full.

·            Less than 90% is achieved say 65-90%.  The Ministry of Finance communiqué was carefully drafted to allow Greece to proceed even if less than 90% is collected. Thus we believe that if a reasonable participation for bonds maturing in the next 2-3 years is achieved then Greece would proceed with the rollover exchange. They would then try to get the rest later possibly by extending the bond maturities to 2025. In this case some close maturities would rally.

·            Less than 65% and the Greeks decide not to proceed with the exchange and thus effectively threaten with a coercive restructuring or with a renegotiation of the agreement of the 21^st July. This would most probably trigger another European Bond crisis with exploding periphery yields and banking crisis. 

We believe that the most likely scenario is the second one. i.e. The full 90% is not achieved but nevertheless the Greek government goes ahead.

IMF- Greek deficit over 10% ??

The IMF left Greece unexpectedly last week. The minister Mr Venizelos tried to play down this sudden departure. According to press reports the IMF team requested more measure to cover a deficit that is getting out of control. There are press reports that suggest that it may jump back to double figures!

The Greeks side is claiming that there is a 1% discrepancy due to the deeper recession and no further measures are needed.  However, the decision of the Greek government to refuse any further corrective measures to fill the 1% discrepancy in their budget target is not irrational despite appearances. It can be seen as a way to pressure European politicians to fulfil their promises on the rollover of the bonds. So far, according to news reports only 50-60% has been committed. The IIF deadline is the 9th of September. Moreover, we have the issue of security and collateral open. Finland is asking for collateral and although the Germans and the French have come down against it orally, their actions do not concur. So one should see this current episode as political manoeuvring and posturing. Lets not forget that the debt is now a European political problem and not just a question of bond maths.

Another dimension however is the growing resistance inside the IMF to continue with the European rescue and in particular the Greek one. Many shareholders of the IMF strongly oppose the IMF involvement and are pressuring the board for an exit strategy. To that extend the Greeks failure gives them the perfect pretext for a graceful exit from Europe. Watch this space as it might shape the events in the next few weeks/months.

Finland-Security. Credit event. Pandora’s Box

Not surprisingly the rushed agreement of the 21^st July created some “collateral damage”. In order to appease the Finnish the Greeks and other European politicians, accepted a clause in the rescue package that allows states to demand collateral security in exchange for participating in the EFSF rescue.

This is a huge blunter from both the Greek and the European leaders who of course have no clue how the bond markets work. In short, allowing collateral security may breach the “Pari Passu” and “Negative Pledge” clauses in many Greek Eurobonds. In fact many of these clauses are present in Spanish, Portuguese and Italian bonds too. Essentially, this clause forbids the issuing state to place any security, lien or other pledge without doing so to every other bond. Failure to do so is a breach of covenants and may be a trigger for a credit event!!

The Greek government doubled the blunter by negotiating with the Finns apparently without the other Europeans knowing. Following this, other European states demanded to have the same collateral security as the Finns. Now everyone is running to close this Pandora’s box. This is a highly technical and legal issue but when someone is dealing with distressed debt the small print in the contract matters!

Currently, there are negotiations to settle this mess, but the Finns seem to be adamant in their demands. There are again few options:

·            Finns do not back down and the Greeks are forced to give some collateral (cash or other) in exchange for the participation of the Finns (AAA country) in the EFSF. If other countries do not follow this paradigm but is contained to only Finland then there may be some legal scramble to avoid triggering the Credit Event. If it is not found, then, firstly the IMF would not be happy as they will be subordinated to Finland (IMF is not a preferred creditor on paper!) and secondly we may have the CDS triggering. Needless to say that giving collateral is a highly contentious issue in Greece that may accelerate unwelcome political developments.

·            Finns do not back down but leave the EFSF. In this case, the whole rescue agreement would suffer a further blow as Finland is a AAA country and may set the example for other smaller states that view the whole Greek rescue idea as ludicrous.

·            The Finns are convinced to back down and the issue is closed. This would be a huge blow to the politics in Finland and a face saving solution needs to be manufactured.

All three cases are messy, typical of the European way of handling things.