Anxiety over PSI and the Greek bond swap

By Marc Chandler

Uncertainty over the participation in the Greek bond swap is a major source of anxiety today. Rumors circulated earlier that the PSI "invitation" would be extended by a week due to low participation have been officially denied, but rumors themselves illustrate the market’s apprehensions.

It does appear that participation will be sufficient to incorporate the collective action clauses (66%), but not the 90% official goal. The Greek government has signaled willingness to invoke the CACs, if necessary. This may have been an attempt to demonstrate its resolve as surely the preferred outcome is to maintain the veneer of voluntarism. Moreover, invoking the CACs would most likely be regarded as a credit event by ISDA and trigger the credit default swaps.

Of the 13-member IIF steering committee, 12 indicated they would in fact participate in the PSI. The one holdout, thus far, is the Landesbank Baden-Wuerttemberg, from Germany. Ironically, German banks reportedly accounted for more than half of the 800 banks that participated in LTRO II and some observers saw a link between LTRO participation and PSI participation.

In any event, the 12 IIF steering committee that will participate account for an estimated 40 bln euros. Greek and Cyprus banks have indicated, according to reports that they will participate as well. They account for roughly another 40-45 bln euros. That brings the back of the envelop calculation to about 80-85 bln euros. To put the CACs into place, Greece needs to get 50% of all the bonds in question (in private hands and under Greek law), which is approximately 177 bln euros. Thus at this juncture officials can be confident that the CACs will be adopted.

However, there is almost 20 bln euros of Greek bonds that are governed foreign law, primarily English law. And it appears that this is where some hedge funds are trying secure a blocking position. For example, some press reports suggest that a CHF2.12 bln bond is one of the focal points for this strategy. Hedge funds are believed to hold at least 30% of this issue and are trying to organize themselves to secure a blocking position that would ensure either being paid in full by Greece, or triggering the CDS that would make them whole.

In recent days, the prices of Greek CDS has risen as more investors suspect that they may be triggered after all and hence seek protection.

On balance, the current available information set suggests participation is coming in around 75-80%. The low end would more than likely see the CACs triggered. At the high end–say 80-85%–and it is possible the Greek government does not trigger the CACs.

If the CACs are triggered, this is likely be fallout in the peripheral countries, including Spain and Italy. There is also likely be negative repercussions on financial sector shares. Currencies like Australian and New Zealand dollars as well as the Swedish krona would likely be sold off. Among the majors the US dollar and yen are likely to outperform. Emerging market currencies would in general also be sold off. Equities would be sold. Core bonds, like Germany, UK and US would likely outperform.

  1. David Lazarus says

    I suspect that the Australian, New Zealand and Swedish governments would like a reduction in their currencies strength. Australia has been slowing because of the strong currency. This would be a good thing from their perspective.

    I have queries as to whether the US and Uk would benefit in the longer term from such an event. Most of these CDS are written in the UK and US, so would expose them to losses, probably manageable but enough to trigger concerns over other exposures. If CDS are truly toxic then they need to be banned, not to be allowed to carry on earning banks premiums that they never have to pay out. That is fraud.

  2. KF Salisbury says


    Are you quite certain about everything you just wrote? For instance, is it really 50% tender to put in the CACs? Or 50% participation in the quorum and over 2/3s assent? And is there a question of whether or not the CACs will be used at 66.6-75% participation?

    I’m a big fan of the site, but I feel like you may have dropped the ball a bit here. On the bit I mentioned, and a few other issues besides. Could use an edit.

  3. marc chandler says

    KF Salisibury asks about the accuracy of this note. I am relying on other sources of course and they may have gotten it wrong. The point is that it appears that 1) participation in the PSI is sufficient to include the collective action clauses and 2) the Greek government has indicated that it is prepared to invoke the CACs if participation rate is low.

    He may be right that if the participation is 66.6% to 75% the government may chose not to trigger the CACs, but I see no reason expect that outcome.

    Unless one is actually has Greek exposure, these nuances may get in the way of the larger picture. The risk is that the CACs will be invoked and this will most likely be seen as a credit event by ISDA Determination Committee insofar as debtors are imposing its will on creditors, and this will trigger the CDS. I tried to be helpful to those who may suffer collateral damage, not those trying to game it.

  4. Jack Pollard says

    OK, from what I have seen it appears that 66% participation is the minimum threshold for CACs to be triggered. This should hopefully be attainable through domestic shells, I mean banks, and various European banks living off LTRO life support. 75% seems to be the minimum level for which the restructuring could suffice in terms of receiving bailout cash.

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