There is definitely something odd happening in Europe. I can’t quite put my finger on it, so I thought I would list out my musings on the topic and see what I can come up with.
Firstly, overnight there was talk that the ECB appears to have entered into a bond swap deal with Greece:
The national central banks in the euro zone are set to exchange their holdings of Greek bonds into new bonds in the run up to a private sector debt deal to avoid taking any forced losses, euro zone sources said on Thursday.
The euro zone is putting the finishing touches to a second bailout deal for Greece for finance ministers’ approval on Monday, paving the way for a debt swap with its private creditors needed to avoid a ruinous default in March.
The deal, which aims to halve in nominal terms what Greece owes to investors, slashing its debts by 100 billion euros, is set to include a legal requirement for bondholders to accept losses. This would have put the ECB in a tricky position, leaving it open to claims it was financing governments.
So what does this mean? Well, if it is true, IMHO it means that the PSI+ deal is nowhere near where it is claimed to be and Greece is just a few steps away from introducing collective action on its bonds. As I stated previously:
One of the other outstanding questions around Greece is what is to be done in the case that the PSI negotiations fail. If that turns out to be the case then Greece will need to enact collective action clauses to force, or at least threaten to force, bond holders into a new deal. CDS issues aside, the problem is that this will require the ECB to come to the table as it holds a large proportion of Greek debt. However, the ECB has previously stated that it does not intend to be part of any such deal and given its position as the “backstop” will not enter entertain any such discussions. Therefore, for a collective action clause to make sense, even as a threat, the ECB will need to offload its holdings of Greek debt to another European institution that could credibly support a collective action against other bond holders.
This deal is simply a twist on that plan as the ECB would be issued new bonds outside the reach of the collective action, presumably under English law. As far as I am concerned this is not the positive news that markets appeared to have interpreted as, which leads me to my second issue.
Back in January I noted that Germany’s rhetoric on Greece had very obviously changed:
Interestingly, what I have noticed over the last week is the sudden rise in statements from European leaders that they may simply let Greece go.
As we have seen over the last week every time Greece presents what appears to be a resolution to an outstanding issue Germany, or one of its northern partners, throws down yet another roadblock.
We have seen this countless times over the last month, beginning with Germany’s insistence that the PSI+ deal wasn’t good enough even though it seemed to have been signed off by both parties. This has continued recently with what appears to be petty demands over small amounts of money and signatures, even though the Greek parliament had already ratified the agreed austerity packages.
Even when all of these demands were met, up pops yet more demands:
On Wednesday, eurozone finance ministers signaled that lenders were closer to delivering a EUR130 billion bailout package after Greek political leaders pledged commitment to a stringent economic reform program and detailed measures to bridge a EUR325 million fiscal gap.
But in a statement, the group’s president, Luxembourg Prime Minister Jean-Claude Juncker, stressed the need for “specific mechanisms” to strengthen surveillance and ensure priority is given to debt servicing.
And there is another problem. In order for the PSI+ deal to occur there are a number of background operations that need to happen, yet given all of the stalling the time table continues to compress.
Briefly the course of events is as follows:
- The offer of exchange by the Hellenic Republic needs to be open for at least 10 days in order to gather up interest and for holders to evaluate the offer. So far no details have been released on the particulars of the offer. There is talk of GDP warrants, and 20 different bonds being offered although not as an option. The IIF may know the details but it does not represent all the bondholders.
- However, a bond holder cannot rationally be expected to commit his bonds if the EFSF money is not in place. There are two technicalities here:
- European parliaments need to approve the package so that the 30billion of the cash component can be in place and
- 35billion need to be approved to have the buyback of the collateral from the ECB.
The last point is a sticky one. Most GGB’s [Greek government bonds] are used by their holders as collateral with the ECB. In other words they are tied in a repo operation with the central bank. Even pension funds that do not have access to the ECB give them to Banks in order to be used for the repo. Thus for these bonds to be available for an exchange they need to be out of the ECB repo. The deal assumes 35billion as a loan from the EFSF so that these Greek bonds can be replaced with suitable collateral for as long as the exchange lasts.
Hence, it is not just the 30billion of the cash offer but also the 35billion for the collateral swap. EFSF would have to issue these bonds and then the process of exchange must start with the ECB. This could take another week.
Even if the Greek side starts the offer on Tuesday 21st Feb right after a successful Eurogroup then the process cannot start until the German parliament approves of the deal which is on the 27th Feb. Why should a bondholder commit or even reveal his intentions before the money is in place. Thus we have reached the end of February with nothing really in place. The first week of March must be used to free the collateral from the ECB and the second to rush the bond exchange if it is for Greece to meet the obligation on the 20th March. If Greece wants to push CACs then the schedule becomes extremely tough.
If the deal with the ECB is actually happening then it would appear that the threat of collective action is on the agenda and the PSI+ deal is going to be forced through at some stage. That being the case , there doesn’t appear to be enough time for all of the operations to occur by March 20 and therefore, under current conditions, Greece would default.
So what does this all mean?
Well I am not sure, which is why I wrote this post. But given all of the evidence I think we are likely to see some sort of small loan being offered to Greece to ensure it doesn’t default in March, but no real deal being offered until after the April elections.
Obviously this is a guess and I am likely to be proved wrong, but at this point in time the available information points towards this outcome. I just wonder how Greece will take the news if I turn out to be correct.