Greek PSI deadline looms
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Greek PSI deadline looms

What Greece has proposed already amounts to a default in economic terms, with the market pricing in a recovery value of less than 25% on its bonds. It remains to be seen whether or not it becomes a default in legal terms

On Monday, 12 members of the steering committee of private sector creditors involved in negotiating the Greek debt exchangeconfirmed they would tender all their eligible securities into the exchange offer.

The 12 are Allianz, Alpha Bank, Axa, BNP Paribas, CNP Assurances, Commerzbank, Deutsche Bank, Eurobank EFG, Greylock Capital Management, ING Bank, Intesa Sanpaolo and National Bank of Greece.

An accompanying official statement conceded that “completion of the approval processes is still under way for a few steering committee member firms”, although, as far as Euromoney can make out, only Landesbank Baden-Württemberg is missing from the list of steering committee members that at the end of February agreed the deal with Greece to put to bondholders.

Uncertainty remains high over the outcome of the exchange offer, with the Institute of International Finance declining to specify how much of Greece’s outstanding debt these 12 firms own in aggregate. Market estimates vary, but they do not own enough to declare the deal a success ahead of the deadline now looming on Thursday.

It is not even clear what level of acceptance the Greek authorities will require to go through with the deal, although 90% is the often-quoted figure. Analysts point out that the International Monetary Fund’s most recent debt sustainability analysis for Greece assumes 95% investor participation in the exchange with every five percentage point shortfall estimated to result in a two percentage point overshoot of Greece's debt target of 120% of GDP by 2020.

Many market participants suggest even 90% acceptance might prove a bit of a stretch, notwithstanding the announcement from these 12 firms, and much analysis is being done on the implications for the credit default swap (CDS) market of Greece invoking collective action clauses (CACs) to force new terms on holders that do not voluntarily exchange their bonds.

Of course, what Greece has proposed already amounts to a default in economic terms, with the market pricing in a recovery value of less than 25% on its bonds. It remains to be seen whether or not it becomes a default in legal terms.

“This block of Greek institutions and compliant European banks is unlikely to be big enough to hit the 90% target for a voluntary deal, and the terms just aren’t generous enough for independent bondholders to vote for it,” says Michael Hampden-Turner, credit strategist at Citi in a note. “However, they should easily hit the 60% target required to enact the CAC and enforce the settlement on all bondholders.

“It is use of the CAC to enforce the PSI on all bondholders that will be the indisputable CDS trigger. The exact day of the trigger is hard to call, but Monday, March 12, seems likely as this is the provisional settlement date. An investor will need to submit a query and then the DC [International Swaps and Derivatives Association's(Isda) determinations committee] will need a day or two at least to decide upon a trigger. An auction will then be scheduled within weeks and certainly before the international-law bonds have their CAC meetings in April.”

So those investors decrying Isda’s decision not to classify as a CDS trigger the de facto subordination of private sector bondholders below the European Central Bank – whose holdings of Greek government bonds will not be haircut – rather jumped the gun last week. Holders who have hedged their exposure through CDS could still receive compensation through this form of insurance.

Rates strategists at Rabobank argue: “Clearly, Greece is a credit event and, hence, CDS payouts simply represent a legal acknowledgement of that fact – a development which would arguably offset some of the significant debasement of CDS as an asset class on the back of the Greek episode.”

Meanwhile, Elisabeth Afseth and Brian Barry, fixed income analysts at Investec, point out that uncertainty over what level of participation will make the Greek government activate CACs could be encouraging more hold-outs. They note: “After all, you look a bit of a mug if you take a huge 'voluntary' write-down while the guys next door get paid out in full.”

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