Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Monday, 2 April 2012

Greek Foreign-law Bonds: No Horsing Around


Greece, unsurprisingly, has been unable to convince its foreign-law bondholders to voluntarily take losses. This is illustrative of the bigger problem that Greece faces further down the line. PSI has converted domestic law liabilities into English law liabilities. It has taken away Greece’s ability to force volunteerism onto bondholders. As Argentina demonstrated, the price of ‘voluntary’ debt swaps for foreign-law debt is penal and unsustainable. Unless one assumes realisation of the rosy projections of IMF-EU, this means either of two things occur down the road:
  1. The next ‘voluntary’ swap at penal rates and substantially bailing out the remaining private holders with public money (Argentina’s mega-swap template)
  2. Disorderly default leading to international litigation (Argentina’s final default template)
Current Greek debt is €259bn of which slightly less than half remains in private hands. (In red in table below)

Table: List of Greek creditors
Creditor
Amount (bn)
% of total
Remarks
IMF
20.49
7.90%
Actual disbursement
EU (Bailout 1)
55.11
21.24%
(110bn bailout, 35.4 undrawn, 20.49 IMF contribution)
ECB (EFSF)
35.00
13.49%

PSI (EFSF bonds)
35.50
13.68%

PSI (New bonds)
64.89
25.01%
31.5% of 206bn
Foreign law bondholders
26.80
10.33%

T-Bills
14.50
5.59%

Hellenic Railways
7.15
2.76%

Total
259.44
100.00%


Events are catching up with elections scheduled early May (6th May is the likely date) and the first foreign-law bond redemption on 15th May. Even if holders of the foreign-law bond are paid back par, the need for further debt-relief will be felt sooner rather than later. Given official reluctance to take losses, the entire burden will be on private bondholders. In the next iteration of the great bailout game EU nations are unlikely to up their exposure significantly. Unfortunately for Greece, bondholders are then likely to use the ammunition gifted to them by the PSI and sue.

Of course, things need not be so dire. ECB or EFSF can take one for the team by buying 2/3rds of outstanding bonds and then agreeing to change of terms through CACs. Or Greece can rapidly return to growth and pay back all its debt.

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