Tuesday, March 6, 2012

Happy PSI Voting?

Alex Chambers and Lefteris Papadimas of Reuters report, Athens, creditor group turn up heat on Greek bondholders:

Athens turned up the heat on its creditors on Tuesday as it sought to secure a bond swap that will cut its mountainous debt, while the main bondholders group warned a disorderly default would cause more than a trillion euros of damage to the euro zone.

Greek private creditors have until Thursday night to say whether they will participate in the exchange that is a key part of a bailout program to help Greece manage its wrecked finances and meet a debt repayment on March 20.

A number of the biggest bondholders are signing up but despite the dire warnings, a clutch of Greek pension funds and some foreign investors rejected the offer which will see investors lose almost three-quarters of the value of their holdings and lop about 100 billion euros off Greece's debt.

Athens ratcheted up the pressure, delivering its starkest signal to date that it will force losses on those who do not volunteer.

Its Debt Management Agency (PDMA) said if it got enough support, it intended to make losses "binding on all holders of these bonds" and said the offer was the best deal they would get, echoing comments by Finance Minister Evangelos Venizelos to Reuters on Monday.

Analysts said an Institute of International Finance document, marked "IIF Staff Note: Confidential", seemed designed to alarm investors into participating in the exchange by estimating the extent of havoc a disorderly default would wreak.

"It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros," the IIF, which represented private creditors in months of tortuous debt negotiations with Athens, said in the February 18 document obtained by Reuters.

If Greece misses the March 20 payment without a deal in place and succumbs to a hard default, it could be taken as a sign that politicians have lost control of the crisis again, prompting investors to target other weak euro zone countries.

Spain and Italy might require 350 billion euros in outside support to contain the fallout, the IIF said, while the cost of helping Ireland and Portugal could total 380 billion euros over five years.

"When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union," it said.

The bank lobby group also said bank recapitalization costs could easily hit 160 billion euros if no swap is agreed.

"Obviously the report is written on a worst-case basis to try and encourage participation in the exchange," said Gary Jenkins, analyst at Swordfish Research.


Greece hopes the exchange will mark a turning point as it enters a fifth year of recession but not all its creditors are willing to take the bond exchange, raising the prospect of Athens forcing them to by legal means, which could become a messy process.

Greek banks, holding 40-45 billion euros of the sovereign bonds, will all take part in the offer, banking sources said. Athens later confirmed its six biggest banks would take part in the swap, and Italy's largest bank by assets, UniCredit, said it would participate.

Nine more major Greek bondholders, all on the IIF steering committee that helped draw up the deal, said on Monday they would support the swap.

The Greek banks and other steering group members hold about 30 percent of the 206 billion euros of bonds in circulation.

Most Greek pension funds will also sign up but four funds with bonds worth about 2 billion euros have refused to do so, a Greek official said. The funds have come under pressure from labor unions worried the writedown on Greek debt holdings will undermine their viability.

Investors in a Swiss-law governed Greek government bond have teamed up to challenge the terms of Athens' proposed bond swap, highlighting the wave of litigation it could yet face, particularly over the minority of its debt not issued under Greek law.

Greece wants a take-up of 90 percent or more, and if it falls below that but exceeds 75 percent it is expected to use collective action clauses (CACs) to force losses on all. It could trigger CACs on Greek law bonds, which account for 177 billion euros of the total, with two-thirds acceptance.

Below that level, the deal could be off, potentially plunging the euro zone back into crisis.

The Greek finance ministry denied speculation that it was planning to extend the deadline on the offer, highlighting the jittery mood just two days before final decisions are due.

"The most likely outcome may well be that Greece passes its 75 percent target and then uses CACs to ensnare the remainder," Jenkins said.

Greece needs to reach that target to ensure it makes the savings agreed under its 130 billion euro bailout deal.

Using the CACs would probably trigger payouts on bond insurance contracts (CDS) and would also increase the chance of hedge funds or other bondholders pursuing legal action.

Complicating the process is the fact that most of the bonds fall under Greek law, but the remainder are under English law.

The deadline for acceptances is 2000 GMT on Thursday, although the foreign law bondholders must hold approval meetings March 27-29 so they would settle at a later date.

Ekathimerini reports that Greek pension funds to decide on debt restructuring:

Greece’s struggling pension funds faced a decision on Tuesday on participating in a huge state debt swap which unions say means disaster for the savings of millions of pensioners.

The Greek government has given holders of state debt until Thursday to decide whether to join the initiative, which aims to cut 107 billion euros ($142 billion) from Greece’s total 350-billion-euro debt mountain.

The civil servants’ union Adedy has scheduled a protest at its own pension fund, Teady, later on Tuesday.

”We call on fund boards to refrain from a new crime against their members,” the union said, terming the debt write-down ”a coup de grace to fund reserves.” Greek Finance Minister Evangelos Venizelos last month told parliament that pension funds hold 27 billion euros in state debt, and that these holdings were fully protected.

”Debt restructuring will not affect pensions,” Venizelos said.

”Each year the state gives the funds over 13 billion euros in subsidies,” he said. ”Hence, in two years, the state budget pays out the entire value of their holdings...we will restore fund possessions to the full.” The debt rollover, supported by a major bank association, is tied to a 130-billion-euro eurozone bailout that will enable Greece to avert default in two weeks when it must repay a maturing bond worth over 14.4 billion euros.

The Institute of International Finance, which represents leading banks and investors, on Monday said key holders of Greek debt had accepted the plan.

Members of the IIF steering committee that accepted the deal include AXA, BNP Paribas et CNP Assurances of France; Germany’s Allianz, Commerzbank et Deutsche Bank; Italy’s Intesa San Paolo; ING of the Netherlands; and Greylock Capital Management of the United States.

Greece’s Alpha Bank, Eurobank EFG et National Bank of Greece have also accepted the terms.

The only steering committee member not on the list is Germany’s biggest regional bank Landesbank Baden-Wuerttemberg (LBBW), although the IIF said the approval process was still underway.

Greece has enacted legislation on a so-called collective action clause to force bondholders to accept the exchange if a majority approves the terms.

According to Germany’s Der Spiegel weekly, the European Central Bank expects this clause will have to be activated owing to low investor demand.

The clause can be invoked if at least 66 percent of banks agree to it. This so-called super-majority then forces all creditors to go along with the deal.

Athens has also warned that 75 percent of eligible investors had to participate or the exercise would be called off.

The deadline for accepting the bond swap offer is Thursday at 2000 GMT.
Zero Hedge citing Reuters, claims the four Greek pension funds holding out are the pensions for journalists, police, the self-employed and hotel workers.

I remember when I met Petros Christodoulou, the head of Greece's PDMA, he warned me that a lot of the leaders of these pensions are politically appointed hacks who do not know how to run a pension fund in the best interests of their members. This is blatantly clear as holding out on this deal is the absolute dumbest thing these small Greek pensions can do.

(Update: The WSJ reports that
Some EUR19 billion worth of Greek government bonds held by the country's state-chartered pension funds will be part of Greece's ambitious debt restructuring plan, a central bank official said Wednesday.)

Finally, with Greece edging closer to PSI deal, I refer my readers to Andreas Koutras' latest comment, Happy PSI Voting:
Sir Arthur Eddington the famous British physicist and author of a book on relativity when asked if it is true that only 3 people in the whole world understand Einstein’s theory of Relativity he famously said “I wonder who is the third?”

In the same spirit I pose the question “Is there anyone in the world that understands the PSI invitation documentation?”. Because if there is there are thousands of investors, institutional and other that would love to hear from him.

There are too many questions that remain unclear. What happens to the Japanese bonds/investors? How about non-qualified investors? What happens if I abstain from voting? Does the Republic have the right to alter the result after the voting by exempting some bonds from the counting? Is the 75% threshold an absolute one or a soft one that can be changed simply by a ministerial decision? Which laws does the Greek Bondholder’s Act 4050/2012 (introducing CAC) suspend? How about European law?

Act 4050/2012 is invoking the “highest public interest” and “Mandatory provision” of Article 9 EU593/2008 (see box below) which suspends the law applicable to contractual obligations.
In a couple of days the PSI offer would be closed, unless of course the Hellenic Republic exercises one of the many rights they have given to themselves and extend the offer for few more days.

Obviously, extending the PSI even for 1 day is not exactly a sign of healthy demand for the new Greek bond beauties but may give enough time for investors to understand exactly what Greece is offering to them. You may also have the time to read the un-official translation of the now famous Greek Bondholders Act 4050 that retrofitted the CACs.

The Key is the 75% option threshold

There are three basic scenarios in the invitation:
  1. More than 90% or 185Billion are tendered for the exchange. In this case, the offering states that Hell.Republic would proceed with the exchange. It leaves the question of activating CAC’s open. In any case, if they activate them the marginal gain would be small as most of the hold outs are Foreign law bonds and these CACs do not apply (they have their own)
  2. If more than 75% (154.2billion) but less than 90%(185billion) tender for the exchange then the Hellenic Republic intents to use the CAC’s after consulting with Troika. Again, if it is, say 89%, then not much is gained by activating but if it is 80% then it looks very likely that they would force everyone (apart from the Foreign Law ones).
  3. The third scenario is the really crucial one and is the key to the whole PSI success or failure. The Invitation states that if less than 75% (154.2billion) tender their bonds for exchange and less than 75% give their consent to the use of CAC’s the deal is off. The PSI is a stiff Dead ex-Parrot (The Monty Python way). This is possible as investors have the option of not tendering their bonds but still voting in favour of the activation (probably a CDS holder has interest in doing so).
What if 75% is not reached?

So what exactly may happen if it is less than 75%. Answering this would give you the answer on how to vote. If the participation is very close to 75% then by kicking some bonds out of the PSI (yes they can do this) they could possibly reach the 75% threshold (in the remaining) activate the CAC and presto. The exempt bonds could then be bought in the open market in a separate buying offer (Yes the Invitation caters for such a case).

If on the other hand, participation is much less but still more than the 66 2/3 that is required by Law 4050/2012 (English translation here) then Hell.Republic may claim that the law overrides the Invitation, they activate the CAC’s and coerce everyone once more.

Now what if they cannot do this trick or they are stopped by some higher moral authority then what is the sequence of events?
  • Most Greek policy makers want us to believe that this is the end and that Greece would default in a disorderly manner. Greece is saying that if investors do not accept the offer it would commit suicide.
  • Somehow the suicide does not seem logical to me. It also makes little political sense for Europe to force Greece into this predicament. After all this may be the first time that failure is not 100% the responsibility of the Greeks. Everyone even the German side admits that the PSI was and is a bad idea. In this case, Europe would have to give a loan to Greece to pay the March12 bond and concoct a new and simpler way to reduce the burden for Greece. The new offer probably could be a buyback tender offer at 30% (say). This would reduce the Debt/GDP (in nominal terms) even more than the 53.5% haircut.
  • Of course there is also the possibility that Greece passes a law making all Greek bonds zero coupon 30Y maturity. Since the PSI collapsed the 177bilion are still under Greek law.
So depending which doomsday scenario you believe you should cast your vote accordingly. If in your mind there is no way Europe can let Greece default disorderly despite the war-words then not tendering may be optimal, especially if you own the March12 bond. If you believe that Greece can default and that you will get even less than what is on offer right now then the optimal is to tender. HAPPY VOTING.
Happy voting indeed! Get on with it already and let's put this chapter of Greek bailout 2.0 behind us. I actually bought coal stocks this morning, focusing on the ADP and jobs report coming out later this week. Think investors are way too distracted with the nonsense in Greece and Europe and many will underperform again this year. I feel another major short squeeze in the works, but who knows, all hell can break loose in Greece or Iran.

Irene Finel-Honigman, adjunct professor of international and public affairs at Columbia University, Michael Pento, president of Pento Portfolio Strategies, and David Kotok, chief investment officer at Cumberland Advisors Inc., talk about the likelihood of participation by private investors in Greece’s debt restructuring. They speak with Pimm Fox on Bloomberg Television's "Taking Stock."

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