Friday, January 13, 2012

Greece on the CAC Warpath?

Ekathimerini reports, Haircut talks to resume next week, Greece mulls CACs:

The head of the Institute of International Finance (IIF) Charles Dallara has concluded his second day of meetings with Greek officials as they attempt to conclude a deal that will see private investors accept a haircut on Greek debt. The talks are due to resume next week.

Dallara is due to meet with Finance Minister Evangelos Venizelos and Prime Minister Lucas Papademos for a third time next week, possibly on Wednesday.

"We will most likely resume talks next Wednesday,» Venizelos told reporters after meeting Dallara for a second day in a row.

"We must process more issues,» Venizelos said.

Dallara left the meeting without making any statement. The IIF warned on Thursday that time was running short to reach a deal.

Amid reports of some hedge funds that own Greek debt planning to hold out, government spokesman Pantelis Kapsis confirmed that Greece is set to introduce collective action clauses (CACs) into Greek bond contracts as a way of ensuring 100 percent participation in the debt restructuring.

"I don't think it will be today. But that such a change will be introduced, that is true,» Kapsis said. «We will take a look at the final agreement and at that point we will comment."

A deal must be struck well before the March 20 bond redemption of 14.5 billion euros, because the paperwork alone will take at least six weeks.

EU, IMF and ECB inspectors, who arrive in Athens on Tuesday for talks on a new, 130-billion-euro rescue plan for Greece, also want to see an agreement on the debt swap before they agree on the bailout.

Any agreement with private bondholders on debt reduction should be in line with the terms decided by euro zone leaders on October 26, the EU Commission said on Friday.

Under the terms agreed in October, Greek privately held debt would be reduced by half, so that, together with structural reforms, the overall debt to GDP ratio of Greece would fall to a sustainable 120 pct in 2020 from 160 percent now.

So will Greece introduce Collective Action Clauses (CACs) in the bonds under Greek law? For more insight into this, please refer to Andreas Koutras' latest comment, Greece on the CAC warpath. Read the entire comment but I quote the following:

Punishment?
Last but not least there is the fiduciary duty of the majority of the bondholders not to act totally against the interests of the minority bondholders. This is a very shuttle and interesting point. CAC’s serve the purpose of facilitating the speedy resolution and restructuring of debt against some incalcitrant and often malevolent bondholders. They are not meant to be used as a punishment or for opportunistic reasons. There have been cases in the past were courts ruled against (See Buchheit, L and Gulati, M (2002), “Sovereign Bonds and the Collective Will”, Georgetown University Law) the CAC majority for basically abusing their dominant position.

What would happen to Italy?
Italy along with Greece does not have CAC in the bonds. Allowing Greece to introduce them in this cowboy fashion would certainly alter the perceptions and risk profile of the Italian bonds. No matter what they say, what happens in Greece sets a precedence that no investor is allowed to ignore in the future.

I listed some of the questions that need to be asked if one is to proceed with the activation of CAC’s in Greece. There is no doubt that readers may have more and please do post them. The one thing that is certain is that Greece would represent the largest sovereign bankruptcy in history. Many legal careers would be made on the corpse of Greece and many would retire writing books about the whole shenanigans. Qui Bono? This is the real question to ask. Who benefits from such a mess? Evaluating the pros and cons it is not Greece. Like in the gold rush, those that advised on prospecting and those that sold the digging were the only real winners.

Spot the Bad Guy
So who are the bad guys in this thriller? The investors that are free riding on the back of the ECB? The ECB which forces a change in the law when it goes against its interest? The Greeks who now can keep on restructuring both malevolent and innocent investors? The politicians? The lawyers and advisors who benefit from a prolonged and complicated default? The IMF that may use this as an excuse to exit a project that has no real control of? Take your pick.

Conclusion
In my humble opinion the risks are much greater for Greece than the benefits. And the same goes for Europe. There are far better ways to deal with the debt of Greece without creating havoc, entering uncharted legal territories or endangering the financial system and the markets. All it needs is a bit of cold calculating logic and good unbiased advice.

Three senior euro zone sources told Reuters on Thursday that Athens was mulling such a bill, which would make a debt restructuring binding for all investors once a certain percentage agreed.Without using so called collective action clauses, the participation rate in any debt swap deal could be smaller than needed because many hedge funds would profit more if Greece defaulted because they would get paid in full from insurance.

Bloomberg reports that Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.

We'll see how this all plays out next week but right now, everyone is nervous and on edge. On top of this, Reuters reports that looming S&P downgrade hits euro zone markets and rattling markets around the world. Don't you just love the timing of these ratings agencies? I think the SEC should tighten the leash on them too.

Below, Hans Humes, president of Greylock Capital Management, talks about a halt in talks between Greece and its creditor banks after negotiations in Athens failed to yield an agreement. Humes speaks on Bloomberg Television's "In Business With Margaret Brennan."

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