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Disappearing Ink
From Peter Tchir of TF Market Advisors
Disappearing Ink
As Europe limps from poorly planned idea to poorly planned idea, they have now resorted to looking at the back of comic books for solutions. They haven’t yet figured out how to use Sea Monkeys, but the Greeks have latched on to the possibilities of disappearing ink, or in this case, appearing ink.
There is a lot of talk about Greece adding a “Collective Action” clause to bonds documented under Greek law. I’m not sure how they could really do this, though I guess they could just pass a new law that overrides terms existing bond documentation? The big question is why are they doing this, what do they hope to achieve?
It seems that the negotiations to get “voluntary” debt reductions are not going well. It seems that there are some holdouts, either those that can’t afford to take the loss, those that hope the Troika keeps furnishing Greece with money to pay off existing bonds, or those who hold CDS and don’t want to give Greece such a big debt reduction that the potential for a future Credit Event becomes unlikely.
What would a Collective Action clause achieve? Let’s say they institute a 75% agreement clause, so that if at least 75% of the holders of any individual bond issue, agree to the terms, then all bondholders are forced to accept the new terms. Will adding a Collective Action Clause make investors agree to the changes? I don’t see why that would happen. If you didn’t agree to the plan being proposed by Greece now, why would you agree to the plan if all they have done is institute a Collective Action Clause. You wouldn’t, so you would still have the same group of holdouts.
What happens if a bond doesn’t get 75% agreement? Then those that agree get the new bonds, and those that don’t agree keep the old bonds. Same as now. But if it is the same as now, why bother? Maybe they need to make it 50% agreement? Or 10%? In any case, there may be individual bonds that don’t meet the Collective Action threshold. For those bonds, it is exactly the same as it is now – except that the government changed the rules retroactively and jammed it down your throats (but more on that later).
What happens if 80% of the holders of a particular bond agree? Then all bondholders are subject to the agreement. Well, guess what, that is a Credit Event! That is exactly what the Restructuring Credit Event is meant to capture. If you vote NO, but are still subject to the change because enough others agreed, then you have a Credit Event! Isn’t this what they are trying to avoid? Adding the Collective Action Clause effectively guarantees that there will be a Credit Event. So long as one holder of bonds with a large enough position to meet the “Default Requirement” and “Payment Requirement” holds out, or votes no, but is forced into agreement by the Collective Action Clause, then it is a Credit Event. I cannot imagine a scenario where a Collective Action Clause doesn’t lead to a Credit Event. So if they were hoping to avoid a Credit Event, they have failed.
Maybe they just want to clean up as many bonds as possible, and are fine with triggering a Credit Event. That is believable, especially now that the net notional of Hellenic Republic CDS is just over $3 billion. So maybe they have decided they prefer to trigger a Credit Event and basically force as many of the bonds as possible into being restructured. They can deal with those bonds that didn’t meet the 75% threshold afterwards.
So a Collective Action Clause will ensure a Credit Event, but would make certain that all bondholders are subject to the restructuring and would leave very few “stubs” or old bonds outstanding.
It is unclear why bonds held by the ECB wouldn’t be affected. It is unclear why bonds held by the Greek pension system would be unaffected. In fact it seems hard to justify having a “preferred class of holder” once you’ve taken the step of changing the law retroactively. Yet, since the ECB is unwilling to take a loss, the ECB holdings will somehow be treated differently. So, not only is Greece retroactively changing the law, they are changing it in ways to benefit certain holders.
What about bonds done under UK law? Those will still have to be dealt with, but guess what? Bonds under the ticker “GREECE” which are governed by UK law total just over €18 billion. Bonds under the ticker “GGB” which are governed by Greek law, total €237 billion. If Greece can cut that big amount by 75%, the residual GREECE bonds should be much safer. Why would holders of those bonds agree to a change. So, holders that have some potential recourse to law outside of Greece would benefit.
Investors will flee locally governed bonds across the board if this occurs. No one would hold bonds that are subject to arbitrary documentation change. Donald Trump has had countless bonds default, yet he is able to return to the bond market time and again. Why? Because, he may stretch the rules to the limit and do everything possible to benefit his position, but at the end of the day, his companies and bonds are subject to rule of law, and investors can count on that. Next time he comes to pitch bonds with a new story and a big fat juicy coupon, some investors will participate because they know the laws and their rights and they will take their chances. Changing the laws retroactively is a horrible idea. It will crumble the faith of bond holders. Remember, these are the people lending to Spain at 4.75% for 5 years. All they get is 4.75% each year and their money back at maturity (assuming no default). They need the certainty that the rules won’t change midway through the term. There are enough bad things that can happen to bondholders – inflation, growing debt, subordination, etc., but having the laws changed on them, is not something they can price in.
Collective Action Clauses will ensure a Credit Event, and will cause investors to pull away from sovereign debt markets as the willingness to treat certain holders preferentially and the willingness to change the laws arbitrarily are risks they aren’t getting paid sufficiently to take.
Now if only they could figure out how to use the Sea Monkeys we might have a real solution.
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I enjoy ink of all colors!
But rates go lower and lower. Germany is now being PAID by creditors for the privilege of selling them debt. That's right. Not just negative real rates, but ACTUAL NEGATIVE RATES.
Hey market!
We're in a historic bond bubble!
Buy gold, bitchez.
http://azizonomics.com/2012/01/10/its-a-bubble/
Anyway without Collective Action Clause, existing Greek crap...sorry, bonds...need 100% tenders to make a full change. So it is idiotic to expect the holders that don't want a "voluntary" cut to agree to a change in CAC that will make them be screwed by a forced voting shoved o Banks. Who else on earth would want to voluntarily restructure? Unless you are ba broke bank and your regulator tells you that either you voluntarily participate or they shut down the curtain of your shop.
Talk to a former GM bond holder to find out what the word "bond" means to a socialist government.
That's where they bond the peasants to the land isn't it?
Nope.
If they are worried about the Germans marching into court and queering the deal, then this is a new level of stupidity. A banker scorned inevitably will wind up in bed with an equally morally bankrupt lawyer- and they will be far more creative at creating havoc then the bureaucrats are at avoiding it. It's giving the mole hill size investors the legal standing to create a mountanous problem...
Central banksters piling in sopping up every gubment bond in sight....hey if people cant see what THIS big picture is all about, then theyre in for some real rough times ahead!
When was the last time the bankers went around buying up all govt bonds and stocks? Right before WW2.
As I'm filling up my car with gas today, I'll know exactly who to thank.
Olli Rehn has been very vocal the last few days saying that the PSI negotiations will follow Oct. summit agreements (50% haircut) and are almost completed. How much of Rehn's assurances are BS?
a broken clock is right twice a day, once a year would be a good hit rate for Olli
It is getting ridiculous with these assurance feeds from Olli. They come out nearly every 2 or 3 hours at this point.
he must be very nervous....pace..smoke break...pace...smoke break...call a reporter and utter some assurance...smoke break...pace....
I have just created a GYNECOLOGICAL WHORE BOND with 100% guaranteed returns. Please PM for prospectus, dissapearing ink and stillborn fetus's notwithstanding.
What laws? Ask the MF Global account holders if the laws prevented their raping.
If You lend me money, I agree to pay in a specified time and interest rate. What is so hard about that?
They are just putting lipstick on the pig.
I can just imagine the banker that came up with this one --> We will put a default clause, then it won't really be a default
The best these 'lenders' are getting now is a promise, if nothing goes wrong, of getting their money back years later with no interest?
Gee, sounds like such a great deal.
It doesn't take much for you to go to Hypothetical-ville, does it? Very imaginative you are...
Changing laws so that the few can affect many is the EU way and they learned from the best: US. Except they forgot to add the all important "for national security".
Sarkozy looks a bit like a Sea Monkey
OOGS! ...that was funny, He does look like one of those little sea monsters. Lol.
Oley! http://www.youtube.com/watch?v=DsYCKu71Qyk
Those @zzhole SeaMonkeys®! How can they, in good conscience, deny Early retirement to comfortable pensions for the Greeks?
Line them up against that little castle in the goldfish bowl and start shooting!
"Dreams Come Due, Government and Economics as if Freedom Mattered", ISBN: 0-671-61159-3, by John Galt
The book is dated, but many of the things it talks about are still valid today (and apparently, going international in scope)!
Can someone give me a factual answer to why Greece can't just print more Euros?
A Euro note is nothing but a piece of paper. Greece is a sovereign nation. Greece can buy printing presses and physically print all the Euro notes they want.
What I want to know is what *exactly* stops Greece from doing this? What army is physically going to use force to stop Greece from printing Euros if it chooses to?
I've never understood any of this talk about how Euro countries can't print money. I don't understand who is going to stop them.
Because Greece doesn't have a currency. They are part of the Euro.
Exactly the reason Mississippi doesn't print more. They can't. Only the FED can do that. Only the ECB could do it for Greece which would require approval of all the other EU nations.
Got it?
I know exactly which army would stop Mississipi from printing Dollars.
I still don't know what army is going to stop Greece from printing Euros.
I read/or heard recently that france has been couterfitting Euro's in this same fashion...........
Significant amounts of money are not printed, they are electronic. A Greek bank cannot claim to have money suddenly appear as it is accounted for through the central bank system. If they tried to invent electronic money or were found to be printing paper money, any reasonable discussions with the rest of the Eurozone would end badly and no one would accept Greek transactions. Nice fantasy, but not in any way practical.
the irish central bank did print up 50 billion about a year ago, they got told off but i think it must have been ok'ed first.
LOL - are you serious?
because it's against the treaty that founded the eurozone and the ECB? It would be counterfeiting, which of course is a crime that has been done very often - though usually during wars...
What army is physically... no, the usual answer to such acts would be an embargo, something you don't want as government...
So, in other words, there is nothing stopping Greece from printing all the Euros it wants.
Well, I guess there isn't anything stopping you or I from printing Euros.
Greek government wouldn't even need to print Euros itself. It could simply lay off all of its law enforcement staff charged with preventing counterfeiting as part of its austerity program and let private Greek citizens create Euros at will.
But it would be promptly kicked out of the EMU.
What an idiot. Go to google.com
Google doesn't have an army, and you aren't taking the question seriously.
Fact: Euros are pieces of paper with ink on them.
Fact: Greece has the technology to print all the Euros it wants.
Question: Who is going to use physical force to stop Greece from printing all the Euros it needs?
Can someone give me a factual answer to why Greece can't just print more Euros?
Because they would misspell it "Gyros" (and people would try to eat them)
Yea. Don't I recall Ireland 'Imagineered ' $50 billion sometime last year? Everyone held their collective breaths waiting for Greeze and Portugal to do the same. What happened to that?
Key news driving the markets for 10 Jan 2012
http://fnn24.com/?p=35930
I see everyone is still confused in thinking that this has anything to do with laws, ethics, or fairness.
They'll do whatever the fuck they want to do.
Wrong.
They'll do whatever they think they can get away with.
According to my running scoreboard I have...
Federal Reserve - $15,000,000,000,000
US Public - ($15,000,000,000,000)
Seems to me they get away with whatever they please.
Pretty much so far.
But there are some things they wouldn't get away with and so wouldn't try even if they wanted to.
credit event sounds like physics, as in the event horizen
Why do people even buy bonds in any of the Euro countries? Seems they are just begging to get fleeced. How much longer before the Fed starts down the same path too?
It's amazing that there is participation in any bond market. Wouldn't everyone be much better off just leaving their "money" in a checking account...or better yet burying it in the back yard in a can?
ARE 'people' buying all the bonds? Or is it the central banks sopping up all the bonds? Seems to me most all these issuances are nothing but central banks and PD's laundering their own monetization of all debts! Last time this was going on? Right before WW2.
Guess two Idjuts think denile is a river in Egypt, SheepDog...
It will not be a Credit Event...that is the most important thing right now...it can not be a credit event....the Banks will insure that...haircuts yes...and new longer terms ..yes...but never a credit event...that will take out the EU..and the US for that matter....because we all know how big that elephant is...or do WE???????????
Its only a matter of timing! This was not all done to BE the 'new normal', this is the fire sale, before the building is demolished.
I can not believe we are still talking about Greece. I wish one of these countries would just have the balls to give the bankers the middle finger and default. News flash...There is life after default.
Everyone has seen Lucy pull the football away...right?
She does it everytime for shit sake.
You want a EVENT....eventually the gap between Natural Gas and WTI will burst... This gap has never been this large..something will have to GIVE....
<== credit event
<== no credit event
vote
Semantics. Retards who wait for declarations are the same people who haven't realized that Greece defaulted a long time ago. This a Clinton-esqe charade for mouthbreathers and people who enjoy thought experiments.
But thought experiments and buying into the meme are so much easier than facing reality. Give someone an easy way out (easy at least initially) and they will almost invariably take it.
Whats happens if the clause is only 0.1%?
If you're gonna default, why go higher?
Why don't they just throw all the Greek bondholders in a prison camp until they agree to write off the debt? Additionally, they could boost the GDP by putting them to work making license plates or something. I bet that'd be good for like a 300 point bump on the DOW.
Also,
Because, he may stretch the rules to the limit and do everything possible to benefit his position, but at the end of the day, his companies and bonds are subject to rule of law, and investors can count on that.
What a fucking bullshit artist. I bet this guy sells cars.
Most of these Grecian Bondholders have foreign accents and probably none of them speak Greek...
If you owned any PIIGS bonds why wouldn't you sell them immediately, even at a significant HAIRCUT..... & why would anyone buy any euro bonds (private parties with real money, verses fake fiat money from the banksters).
If you have to park money someplace, just buy US Govt short term T-Debt, else abandon the entire bond word and buy physical assets that will have some value on the other side of this financial disaster..... otherwise you'll have paper to wallpaper the outhouse.....
If I owned Greek bonds with CDS protection, no way would I accept any form of haircut. I would simply hold the bonds. If Greece continues to pay on them, no problem! And if Greece stops paying, they would be a credit event and I could collect from the CDS.
This assumes that my CDS counterparties are solid. But Greece is probably small enough that it wouldn't break the CDS system. Italy or Spain would be a different can of worms (or kettle of fish, depending on your culinary preferences).
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