It’s the eve of the Greek PSI bond swap and the pledgers are beginning to roll in:
Investors with at least 58 percent of the Greek bonds eligible for the nation’s debt swap have so far indicated they’ll participate, putting the country on the verge of the biggest sovereign restructuring in history.
Greece’s largest banks, most of the country’s pension funds, and more than 30 European banks and insurers including BNP Paribas (BNP) SA, Commerzbank AG (CBK) and Assicurazioni Generali SpA (G) have agreed to the offer. That brings the total to at least 120 billion euros ($157 billion), based on data compiled by Bloomberg from company reports and government statements.
58% is still nowhere near what Greece needs for a clean deal, but it is looking more and more likely that we will see collective action. At least that is what markets appear to be predicting and the IDSA is preparing for:
The International Swaps and Derivatives Association is busy preparing behind the scenes for potentially the highest-profile auction for credit default swaps the organisation has overseen.
There are still doubts over whether the plan to haircut €206bn of privately-held Greek debt to 53.5% of face value will go ahead, with Thursday’s deadline for participation swiftly approaching. But presuming it proceeds and collective actions clauses are exercised, it is widely expected that Greek CDS will trigger by the exchange’s settlement on March 12.
…
The CDS market is showing further signs of an approaching trigger. At 20% of face value, Greek-law bonds are trading below recovery swaps at 23 points upfront. It’s very rare for bonds to trade below recovery levels, indicating the market does not believe these bonds will be deliverable into a CDS auction. At the same time Greek five-year CDS has pushed out over the past few days and is now trading in line with recovery swaps at a bid-offer spread of 75/78 points upfront.
“I don’t think there is going to be an issue with the auction. For people outside it seems very complex, but it’s relatively straightforward for those who have done their homework. The biggest issue is whether it actually triggers, not the actual settlement of it, and the CDS and recovery market tell you people expect it to trigger,” said one European head of credit trading at a major house.
As I mentioned last week, the impending default by Greece led the rating agencies to downgrade their rating to “technical default” which in turn led to the ECB removing Greek debt from the eligable collateral list. Over the past few days we have seen the fallout from this operation as the ECB has requested an additional €17bn in collateral from banks who previous pledged Greek bonds (see this ECB statement point 2.5).
What is worrisome about these margin calls is that we know banks of the weaker nations were the ones most likely to gobble up their national sovereign debt using the LTRO carry trade. If we see a swift post-LTRO reversal on the value of those bonds then we could suddenly see periphery banks asked to handover additional capital to back those loans that they simply don’t have.
This is certainly something to watch for the Portuguese banks because the country’s soveriegn bonds continue to devalue and it is therefore possible we will see some sort of “panic sell” event if the ECB suddenly demands more collateral on the 3yr LTRO loans. This is also a possibility for Spain because, as I have been covering, the countries fundamentals are way out of line with the recent shift in sovereign yields and I have been questioning exactly what we will see once the 3yr LTRO operations come to a close. This is something, it seems, the market is now waking up to:
Spanish bonds are underperforming those of Italy as concern the Iberian nation’s economy will struggle to grow has left it trailing in a rally sparked by two rounds of extraordinary European Central Bank lending.
Spain’s benchmark borrowing costs rose above Italy’s for the first time in almost eight months last week after Prime Minister Mariano Rajoy said his nation’s 2012 deficit would be higher than agreed at budget talks with the European Union. Italy’s 2011 deficit narrowed more than economists forecast even as the economy slipped into recession
As an aside to all of that I have noticed that the use of the ECB’s margin lending facility has started to creep up again which suggest there is some more trouble ahead in the Eurozone banks.