Greek Bailout #2 Is Dead On Arrival: A Few Good Hedge Funds May Have Called The ECB's Bluff, And Hold The Future Of The EUR Hostage

Tyler Durden's picture

Even as the general market, dumb as a doorknob, had been following every headline out of Europe, soaking up the BS that Greece may after all end up being bailed out in some miraculous way, there were those who wondered about the legal basis of the Greek bailout #2, also known as a redux of the "Vienna initiative." The problem with the second "Deux Ex Machina" bailout is that there is absolutely nothing Deus about it, no Ex, and most certainly no Machina. In fact, as it now clearly appears, the whole rescue package is flimsier than a house of cards and a quick read through the indenture makes it all too clear. The key reason why the voluntary Vienna Initiative worked back in 2009 is that the alternative was the end of the world, and nobody would profit from not going along with the herd. This time things are diametrically different. The key phrase (or two) in the proposed package: "Voluntary" and "Collective Action Clauses"... Well as the following excerpt from Citi explains, both of these critical (as in binary: without them, Greece is dunzo) assumptions are unworkable, and explains why every single Greek bond in recent weeks has been purchased by hedge funds who have remembered that the economics of "nuisance value" when the upside of bluffing the EUR printer is virtually unlimited. Which means that not only is Bailout #2 in jeopardy of not passing the Greek parliament, but that we may suddenly find ourselves in the biggest "activist" investor drama, in which voluntary restructuring "hold out" hedge funds will settle for Cheapest to Delivery or else demand a trillion pounds of flesh from the ECB in order to keep the eurozone afloat. In other words, the drama is about to get very, very real. And, most ironically, a tiny David is about to flip the scales on the mammoth Goliath of the ECB and hold the entire European experiment hostage...

The smoking gun courtesy of Citigroup:

Legal Characteristics of Greek Government bonds

After the question of whether or not a restructuring will occur and when, the next most important question for most investors is whether or not it can be done in such a way as to not trigger CDS. Lee Buchheit3 has indentified several aspects of Greek debt that are relevant. In particular, the large amount of domestic debt without features such as cross defaults and negative pledges should facilitate a number of restructuring options.

There are €327bn of outstanding Greek government bond debt, of which €9.8bn are treasury bills. Of the total, less than 2% is in dollars, yen, Swiss francs or other foreign currency. From a legal standpoint, the most striking feature is that 90% of the total bonds are governed by Greek law with the majority of the remainder under English law. Figure 2 illustrates that a large portion of the international debt is only due after 2016. These factors have significant implications for Greece’s options if they decide to go down the restructuring route.

Greek law bonds have no Collective Action Clauses (CACs) which mean that voluntary restructurings require 100% of investors to accept the new terms in order to avoid triggering a default, an almost impossible hurdle. Greek sovereign bonds issued under English law prior to 2004 have CACs which permit 66% of bondholders consent to modify terms that would bind all holders. Post 2004 75% of bondholders consent is required but the scope of potential revisions is broader.

The situation is similar for negative pledges which are only found in English law debt. The clause requires Greece equally and ratably to secure each of the bond issues if ever it creates a security interest over its revenues, properties or assets to secure any external indebtedness. This is normally applied to foreign currency borrowings and only really makes sense prior to Greece joining the Euro. Therefore, negative pledges in euros only really apply to bonds issued after 2004, a relatively small percentage.

Equally, cross-acceleration, cross-default and moratorium event of default clauses only apply to international debt denominated in currencies other than euros. Therefore bondholder remedies such as acceleration are only relevant to a very small percentage of debt issued before 2004.

Given that the percentage of bonds with difficult clauses is relatively small, Greece could presumably offer some form of tender, additional collateral or waiver for them. This opens up a number of possibilities. For example, it would be able to collateralize a future Euro-denominated issue of securities in a European version of Brady bonds. Or alternatively, obtain a partial guarantee of the new instruments from a creditworthy party as the Seychelles did recently.

Looks like someone in the troica did not do their homework...

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Reese Bobby's picture

Good luck in Greek court!  

topcallingtroll's picture

Creditors are not stupid.

The bonds have clauses that they are under jurisdiction of UK courts in most of them.

The greeks couldnt sell an international bond without such clauses, their corrupt practices being so widely known.

Reese Bobby's picture

I assure you creditors are routinely stupid.  However it was fun watching them take their Southern District of New York victories to Indonesia a decade ago.


In any case, have you noticed courts are now political bitches: e.g. Chrysler and GM.  Contracts aren't what they used to be...

Ahmeexnal's picture

And exactly as expected, France is the latest north african country to erupt into violence:


Midget man Sarkozy is soiling his pants right about...NOW!

Husk-Erzulie's picture

Thanks for the post.  Luke Rudowski is a great patriot...old school.  In fact, he is probably more the "statesman" than Bummer, Merkel, Sarky and one hundred of their closest hench-persons put together.  Funny, the French gendarmes, despite their brand new NWO kit, didn't seem to be taking any pleasure at all from  their role.  No lust for blood sport in their faces, just resignation, maybe its just the way the vid was edited- who knows.

Reptil's picture

Yes I noticed this too. Also it was evident this is (still) a very small group of protesters.

Boop's picture

For example: 

New York court clears Barclays of dumping toxic mortgages

The Independent, By Stephen Foley in New York

Barclays has emerged victorious in a long-running legal battle over its actions on the eve of the credit crisis, during which it allegedly dumped hundreds of millions of dollars of toxic mortgage assets on to unsuspecting investors.

The New York Supreme Court approved the dismissal of a lawsuit from the French fund manager Oddo Asset Management, which said Barclays had used off-balance-sheet vehicles as a "dumping ground" for mortgage assets that the bank knew were about to plunge in value.

The case involving the British bank was one of hundreds working its way through the US legal system.

Michael's picture

All the seedy financial nuances of the complete and total world economic collapse I've created are so, so delicious.

It was the only way to starve the beast. Sorry.

topcallingtroll's picture

I understand.

The socialist beast wouldnt stop. It wouldnt compromise. It kept taking more and more.

Killing it was the only way.

Michael's picture

It was the relentless taunting I and the blogosphere have done to them since the early days of the dot-com bubble. You know how ego maniacal wealthy elites hate being told they are wrong and their bubble is going to burst. So what do they do, they just keep blowing the bubbles bigger and bigger to prove they are right. I was counting on their reaction to all our taunting, their pattern indicates two dimensional thinking.

The biggest bubble is about to burst and I fully expect the beast to be killed by their own creation.

Monty Python and the Holy Grail-French Taunt

Michael's picture

I love it when a plan comes together.

Expect many aristocrat banking houses to be cannibalized by the European banking cartel hive. Their families are going to be poor. No castles to live in anymore. They'll have to eat porridge and they won't be happy about it. It's about survival of the hive. I don't think the hive collective is into forgiveness of debt, especially for lodge members. No that would show weakness of the collective hive. Although many of the people in those banking house families carry a stinger and may use them to spill the beans. They don't like porridge.

Michael's picture

At the end of the day, us sheeple just want our goddamn water flushing our toilets without interruption.

Please don't price us out of ever not being able to pay that bill.

Michael's picture

Porn is the protector of the Internet. Porn is the internet god/goddess of the internet.

40% of all web traffic is porn related.

If Obama shuts down the internet, those 40% of the internet population will be very angry at him for depriving them of their on-line porn fix.

Hail to internet porn godds.

Sorry, I'm just musing.

topcallingtroll's picture

Time for the EU and ECB to put up or shut up.

Default or pay off bonds as they mature at par.

Hedge funds are in a great position here!

slaughterer's picture

This legal clusterf*ck should be enough to knock the EUR/USD below 1.40, don't you think?

topcallingtroll's picture

Strangely it may strengthen the euro.

I would love to hear yen cross pontificate, but he never indulges in macro themes.

I am a Man I am Forty's picture

no bailout and austerity strengthens euro

Vampyroteuthis infernalis's picture

Disagree! The Euro is going to weaken as many of the European banks will be forced into insolvency. Since the European states are backing these banks, the states will quickly follow.

Reptil's picture

Yes, this is the idiocy of it all. A correction in 2008 and bank defaults would've weeded out the bad and guaranteed a strong euro. Germany was happy with a weakened one though, for it's exports, but now it's citizens have seen the trap that is unlimited, never-ending bank bailouts, putting already overleveraged public assets at risk.

Because that's what "austerity" really is. Squandering of public assets. No one mentions bank bailouts anymore, or the connection between bank bailouts and "austerity measures" anywhere in public media. They're in for quite a shock. Warnings were unheeded since "the economy is doing well" and "we always will have the boom economy of China as trading parthner"..

Expect massive whining that "it's not fair", since the prevalent idea was that politicians would come to the rescue and work out a bold strategy of coherent european government. Of course that's not going to fly, but "basic rights" are next on the list to be squandered, to save the banks.. eehm greeks.

Hans-Gunter Redeker, global head of foreign exchange strategy at Morgan Stanley was less than optimistic about the immediate future for the euro-zone and said he believed that the political process toward greater fiscal union - and ultimately a transfer union - would pick up pace.

"That will ultimately hold the euro-zone together even though the crisis will worsen," he said.


(for those that know dutch, the comments may be interesting)

I'd like to again point at the analasys of prof. Schachtschneider, who has exposed the silent coup d'état, towards a maoist model of planned economy (and everything else) that has now corrupted the formation of the EU.

There's a dutch saying which goes "you can only spend a guilder once". They forgot that, on the way to their workshop to learn how to represent us, in a tropical location, paid for by yours truly, in taxes.

holdbuysell's picture

Alright, obvious question: what are the hedge funds positions?

knukles's picture

Ah, the full effect when thought about for a moment will essentially be probably just another kicking of the can down the road, additional matters of great importance to be considered wisely (this is Greece after all) that must be addressed before we can proceed any further...    hell of a wonderful gift to the parties.... the blessing of time.  And even better, now in the clogged, stuffy, slow, impenetrable bowels of the venerable Greek court system (slowly I turn, step by step) which could take years.....

A state of bureaucratic stasis quite unlike any other in the modern era handling weighty decisions directly impacting the future construct of the EU as an entity.  Freeing the politicians to prognosticate, petition, project, continue to accomplish naught whilst making matters worse, all charged to the public trough.

While the bankers continue to soak the treasuries dry, politicians recieve tribute and distribute largesse....

The myriad of consultations, meeting and summits grow in weight of purpose, frequency, likley remaing barren in conclusive order.

It's a winner! 

lolmao500's picture

And what happens if they default on domestic bonds?

slaughterer's picture

I can see how the politicos will play it to the cheap seats: "Those evil hedge funds (speculators)."

Gyro Gearloose's picture

Perhaps it's fitting that "troica" also means "Thrombolysis In Cardiac Arrest"

williambanzai7's picture

The legal devil is in these kinds of inconvenient details.

The same legal devil that is tormenting Eric Holders fraudclosure whitewash.

steve from virginia's picture

Endless nonsense ... Mexican standoff with water pistols ...

Al Gorerhythm's picture

Hmmmmmmm. Curiouser and curiouser.

chump666's picture

Yeah it will be a flop.  EUR shots, USD bid

phungus_mungus's picture

Oh goodie... more lawyers, just what any financial crisis needs.... 

Id fight Gandhi's picture

Just give the Greeks blank checks and forgive the debt. They have no means to pay it back and the EU doesn't want a default to ruin their world.

This tiny county has them all by the balls

CrashisOptimistic's picture


Legal Characteristics of Greek Government bonds

After the question of whether or not a restructuring will occur and when, the next most important question for most investors is whether or not it can be done in such a way as to not trigger CDS.



richard in norway's picture

bbc radio is saying that us banks are on the hook big time if the greek default, us banks are second or third most exposed to piigs debts was the headline


want to do a swap for some muni shit

dolly madison's picture

"bbc radio is saying that us banks are on the hook big time if the greek default"


Good.  The more damage to US banks right now the better.

Mineshaft's picture

"Even as the general market, dumb as a doorknob, had been following every headline out of Europe, soaking up the BS that Greece may after all end up being bailed out in some miraculous way"


Umm hate to inform you but Zerohedge are the ones with the headlines every 5 minutes on the impending bailouts:

That was your copu paste from Reuters and you fully believed the statement hence you own commentary: Congratulations Europe: you just screwed your taxpayers, but at least bought your insolvent banks 3 more years of bizarro world existence.


Stop playing it as if you know more than everyone else.  You look foolish.

chump666's picture

Greece defaulting wouldn't do sh*t to the EZ, just make it smaller and warn crappy countries to act smarter with their finances.  It's all about the ECB/EU/IMF maniacal Keynesian pride that all.

The hedge funds will clean up the mess.

slewie the pi-rat's picture

so...the demonstrations were effective, right? 

Spitzer's picture

The Euro is slowly but shurley dethroning the US dollar.

chump666's picture

ECB will rev up the rhetoric to overdrive. 

wombats's picture

Expect Bernanke to bail out the Greeks to save the world econamy!

Captain Planet's picture

yea, greece can start paying back their debt with bennybux!

bring the greenback to greece in suitcases for every family (kinda like our rebate check under Bushi) and just create another satellite dollar economy.

The only way to keep the ponz...

maybe events from MENA into north MENA can also be considered bullish for the spike in police overtime income, hospital bills (new CDOs available) and the general rebuilding of whatever went kaput.

Nevermind that spanish farmers of cucumbers and salad green were dumping their unmarketable produce on the steps of german consulates

All I can say is NATo is going to be tested in some bizarre ways, very soon.

Dolemite's picture

Precious metals to present good buying oppurtunity after a near term correction?

Gold and silver showing signs of weakness, and oil is confirming.

djsmps's picture

The Savior-Of-The-World-In-Chief is about to announce that the Greek bonds are backed by the sovereignty of the United States.

GMRobertson's picture

Pretty sure about this - US banks for the most part are out of harm's way in relationship to Europe.

GMRobertson's picture

Karlsruhe is the unmentioned but most important player in all this....Merkel's dithering is related to trying to avoid the Karlsruhe taking up the Hankel/Schachtsshcneider/Starbatty/Nolling suit.

The joke is that any action taken by Germany, and likely all action taken to date with the EFSF and prior ESM is at best extra-constitutional and likey it is not constitutional as per the German constotution.

The German constitutional court in Karlsruhe can shelf any process if it is deemed to present immediate risk to Germany, but it cannot eliminate considering such measures once the danger passes.

The true crisis for Europe that will stop the kicking the can down the road will be a constitutional crisis from Karlsruhe.

AldoHux_IV's picture

The idea of privitizing a nation's assets and allowing any rights to a nation's revenues other than the people the nation is made up of is quite absurd.  There is no way the terms of the bailout will ever pass and be upheld even if the EU/IMF force it upon Greece's politicians.  It's no way to run a country and the citizens will not accept it. You're telling me that Deutsche Bank, SocGen, etc. are now going to be in the business of running a country along with all its other businesses?  These are failed broke institutions that wouldn't exist had the printing presses begun to go into overtime.  They can't manage their own businesses let alone a nation of people-- these blackholes of capital and economic benefit will soon collapse under their own weight.  Therefore all this talk about downgrades on voluntary or involuntary defaults is just plain silly as in the end whether legally or not defaults will occur and pain will be felt amongst the financial institutions and their shareholders.