Why it will be logical to some existing bondholders to say no to the Greek debt restructuring or PSI deal

7th March 2012 by Shaun Richards

Yesterday was a day where we saw substantial equity market falls for the first time in a while and the first time in 2012 so far. The US Dow Jones Industrial Average fell by 203 points for example and the link with today’s theme is that at least some of the fall was blamed on the situation in Greece. It also allows me to point out the recovery in equity markets which has taken place in recent times. In spite of yesterday’s fall 2011 ended with the Dow Jones Industrial Average at 12217 so it is still up considerably and in fact until yesterday we were at levels not seen since early 2008.

Since then we have had some news on the economics front which is that Australia’s economic growth in the fourth quarter of 2011 was only 0.4% which was half the rate of the previous quarter. So her quarterly economic growth as measured by Gross Domestic Product figures has gone 1.4%,0.8% and now 0.4% giving us a trend which is clear and sadly rather familiar. Indeed half of the growth was caused by an increase in government spending adding further gloom to the numbers.

In many ways her enormous commodity resources have allowed Australia to have a relatively smooth ride through the credit crunch era but two problems may be coming home to roost. Firstly an over-valued exchange-rate which is a consequence of the resources strength and a house market boom which has ended and may yet turn to bust.

Greece and her debt restructuring

Where do we stand?

The offer is as follows from the Greek Ministry of Finance

an invitation to private sector holders of certain Greek bonds to exchange their holdings of existing Greek bonds for new bonds to be issued by the Hellenic Republic having a face amount equal to 31.5% of the face amount of the debt exchanged and notes of the European Financial Stability Facility maturing within 24 months having a face amount equal to 15% of the face amount of the debt exchanged, each to be delivered by the Hellenic Republic at settlement. Each participating holder will also receive detachable GDP-linked securities of the Hellenic Republic with a notional amount equal to the face amount of the new bonds of the Hellenic Republic issued to that participating holder.

So there you have it 46.5% of your money back in total with an additional option or hope that you might also benefit from the GDP-linked securities. However eyes will also have turned to this bit.

the (Hellenic) Republic has positive GDP growth in real terms in excess of specified targets.

Positive GDP growth looks a long way away right now although over the period such a deal is intended to last much may (and hopefully will…) change.

For those wondering why net present value losses are estimated at 70% or so as opposed to the 53.5% implied above this is because future interest-payments are lower too.

2.0% per annum to payment date in 2015

3.0% per annum to payment date in 2021                     

4.3% per annum thereafter                       


We immediately see that the deal is not as clear cut as many would have you believe. For example the mathematics of the deal is calculated on the basis that Greece can raise the coupon payments to 3% in 2015 (and 4.3% in 2021). What if she continues on her downward trajectory and cannot? In addition the GDP-linked securities are complicated and raise their own uncertainty.

Also the coupon on the new bonds will bear no relation at all to the likely yield on the new bonds which says it all in many ways. Even 4.3% is nowhere near the possible 19/20% yield on new Greek bonds (h/t Pawelmorski).

I am reminded that the same group of people who turned down a 21% debt reduction last autumn are supposed to accept a much higher reduction now! Mind you by its latest output Greece’s government may be thinking the same.

The Republic’s representative noted that Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI (Private Sector Involvement).

They decided to lob in a threat as well, although some may consider it a long-hoped for promise!

if PSI is not successfully completed, the official sector will not finance Greece’s economic programme and Greece will need to restructure its debt (including guaranteed bonds governed by Greek law) on different terms.

What is the deadline?

8pm tomorrow night (8th of March)

The Greek government keeps telling us that this is a final date and will not be changed although I note that the documentation says this.

Unless extended,re-opened,amended or terminated

Legalese perhaps but a note of uncertainty too!


I am left with the thought that we will see a substantial amounts of rejections of the deal. If I was not already of that sort of mind it would have been made up for me by this from Kathimerini discussing Greek pension funds.

Nevertheless, four pension funds, which hold about 2 billion euros of Greek debt, said they would not take part in the deal.

To put this into perspective this is four of twelve they contacted. But to my mind if even Greek pension funds cannot see a way forwards for this then we can expect a flood of foreign investors to turn it down too. If you look at game theory you would argue that a small number of rejections might win (as in a small number might mean that it is cheaper to pay them off…) but that a larger number cannot win initially as it would be too expensive to pay them out.

However in something of a catch-22 situation investors I feel may be questioning the fact that they are hanging their future on the Hellenic Republic and the EFSF.

The problem that is the Hellenic Republic

The idea that Greece can get her national debt down to 120% of her Gross Domestic Product looks a fantasy. Even if she could do it there is no significance to 120% and any logical plan would aim for 100% as a maximum. Accordingly on many indeed perhaps most projections forwards a second haircut/PSI looms.

If we look at the latest evidence for her economy this thought gets further backing.

in November 2011 the total Building Activity (private-public),,,,,,, reflecting respectively a 8.0 % decrease in the number of building permits, a 28.5 % decrease in surface and a 26.6 % decrease in volume, compared to the month of 2010

 When we recall that this comes on the back of previous falls we see how grim the situation actually is with no sign so far of any stabilising elements.

The European Financial Stability Facility

There is a problem here too,to my mind. You may wonder how a vehicle that Euro zone politician’s such as Christine Lagarde described as something which would provide “shock and awe” might be a problem. But you see whilst the mainstream media was lauding it for borrowing relatively cheaply this week they missed the significance of the fact it was issuing 3 month paper only. So bond-holders are supposed to rely for years and indeed decades on an institution which has been reduced to funding itself on a three monthly basis! Not quite “shock and awe” now is it? Unless it is at the incompetence and indeed arrogance displayed.

Finland and its collateral

This issue has slipped under the radar at times but if you were a bond investor you might wonder as to exactly what collateral has been pledged to Finland in return to her participation in Greece’s bailout. After all should things go wrong there are plenty of other exclusions such as the European Central Bank and the International Monetary Fund and bond investors might be mulling the words of Seasick Steve.

You can’t take what I ain’t got…….

Cause I started out with nothing
and I’ve still got most of it left


So there you have it. There are logical grounds for saying no to this deal and in spite of the threats against so doing I expect that we will see a substantial number do so. Such a number will have several consequences.

1. Collective Action Clauses or CACs will be activated in an attempt to impose the deal.

2. This will be declared an official default and Credit Default Swaps (CDSs) will then pay out. This of course creates its own problems as profits and losses will be made and it will be interesting to see who wrote these derivatives. I expect a familiar role-call. As an aside this development was always likely and is why I was not particularly bothered by last week’s decision by the relevant authority on whether CDSs would be activated.

3. Some investors will take Greece to court over this and I expect litigation to go on for some time,maybe years.

So as of 8pm what do I expect to be solved? Nothing.

One possible hope is that the likely shambles will push Greece towards a much better way which is default and devaluation as I have argued many time on here.

8 thoughts on “Why it will be logical to some existing bondholders to say no to the Greek debt restructuring or PSI deal”

  1. Anonymous says:

    Hi Shaun,

    You were asking several days ago what could go wrong in Germany. Hans-Werner Simm has discovered an imbalance the the accounts of Europe’s central banks which he claims could become a half trillion euro loss for the Bundesbank. And if Greece disorderly leaves the euro, they calculate a 30 million euro loss for the Bundesbank.


    1. ealingalf says:

      Interesting article ExpatBG
      Minor (major!) correction –  And if Greece disorderly leaves the euro, they calculate a 30 Billion (30,000,000,000) euro loss for the Bundesbank. 

      1. Anonymous says:

        Thanks for correcting my typo.

    2. Anonymous says:

      Hi Expat and thanks for the link.

      Mr.Sinn has been making lots of noise around the “Target 2” or monetary imbalances area for a while. He overstated things about a year or 18 months ago but there is a fundamental issue.

      In essence what happens when you have a currency between a group of countries and one or more leave? Sometimes it will be orderly but what if they say no to a rebalancing?

  2. Anonymous says:

    Valuable piece, Shaun. As I write this at 1430 Central European Time, I see that just under 40% have signed the PSI…..a long way to go to 75%+ and I wonder whether they will make it by the deadline.

    1. Anonymous says:

      Hi Ray

      I think that the rumour mill will go into overdrive between now and 8pm UK time on Thursday! Only after then will the numbers be reasonable clear but then on many outcomes the legal disputes will start.

  3. JW says:

    Hi Shaun
    The hand of the ‘no’ camp just got stronger overnight with the news that a US judge has ruled that the Argentinians have to pay out interest owed to a vulture fund ( part of Elliot Mgmt) who bought old bonds prior to the Argies last default. Indeed the ruling states that the Argies cannot return to the market until they make the payment.
    Why would any ‘independant’ hedge fund say ‘yes’ to IIF now?
    The question is, how ‘disorderly’ will the Greek default be?
    On a related topic, apparently the ECB is increasing margin calls on the assets held under the LTROs. This could have detrimental effect on banks alround , but especially Portugese ones with no new assets to pledge. Rehypothecate soveriegn bonds just bought under the LTROs? The whole eddifice is chasing its tail to oblivion.

    1. Anonymous says:

      Hi JW

      I expect we will see plenty of funds declaring for the deal but of course many of those who intend to turn it down will remain silent. There is only really an incentive for the yes camp to declare ahead of time and the Greek pension funds must have been really aggreved I think.

      Perhaps the ECB is (rightly) worried about its balance sheet!

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