Goldman's Greek Deal Summary: Increased Likelihood Of CDS Trigger And CAC Use Will Lead To Volatility

Tyler Durden's picture

While we await for Thomas Stolper to issue his latest flip flop and to go long the EURUSD again ("tactically", not "strategically"), here is Francesco Garzarelli's take on the Greek bailout.Here is the biggest issue: "Increased likelihood of CDS: Moreover, higher losses inflicted on the private sector, involving the likely activation of CACs and the triggering of CDS, represent sources of near-term volatility." Bingo. Now as we pointed out in the previous post, a "successful" and completely undefined PSI program is a key precondition to the program. However, with bondholders now certain to throw up, and the requisite 75% (forget 95%) acceptance threshold unlike to be reached, will the use of Collective Action Clauses, and thus a CDS trigger constitute a PSI failure, and thus deal breach? In other words, since we now know that the March 20 bond payment will be part of the PSI, is last night's farce merely a way to avoid giving Greece a bridge loan, and putting its fate in the hands of creditors, which as we noted back in January is a lose-lose strategy?

From GS:

Overnight, Finance Ministers in the Euro area reached a deal on Greece, aimed at achieving a 120.5% (sic) debt to GDP ratio by 2020, and paving the way for parliamentary approval in member countries of a second package of official aid worth EUR130bn. This would bring the total committed EMU tax-payers funds to in excess of EUR200bn. Below are our initial impressions, drawing on official statements and press reports.

The positives include:

  • Progress on Greek PSI: Relative to the tensions last week, progress has been made towards a substantial reduction of Greek debt through the PSI (estimated at EUR107bn, or 50% of 2011 GDP, will be pardoned), and a mutualisation of the remaining portion on the Euro area’s official sector’s balance sheet. As we have noted in the past, after the liability management exercise, the share of Greek liabilities still in private hands will be substantially reduced (and estimated to be roughly 25% by end-2014, including the part relating to the EFSF guarantee on new Greek debt).
  • Reduced risk of disorderly default: The introduction of a segregated account in which each quarter’s debt service will be paid in advance, together with a national law giving priority to debt servicing payments, should reduce the risk of a disorderly default and thus the systemic relevance of Greece.

The negatives include:

  • Growth concerns: In its communiqué, the Euro group insists that the agreement is conditional on Greece fully implementing a revised adjustment program (official details of which, including crucial assumptions on expected nominal growth, are not yet available). To this end, surveillance by the ECB/EU/IMF ‘troika’ is strengthened. But with ongoing economic duress and the upcoming general elections, uncertainty remains around how fast the country will be able to bring its non-interest deficit (estimated at 2.5% of GDP in 2011) into surplus of at least 1.5% of GDP. And the slow progress so far in delivering politically unpopular structural reforms and privatizations are not reassuring. This may lead to further frictions with EMU partners, leaving the risk of Greece's EMU exit in place.
  • Increased likelihood of CDS: Moreover, higher losses inflicted on the private sector, involving the likely activation of CACs and the triggering of CDS, represent sources of near-term volatility.

The market has already rallied substantially in anticipation of a deal being reached. We continue to see tail risks in the upcoming two-three months linked to the implementation of the PSI and Greek elections.

Turning to the details of the deal itself, the official sector will contribute in two ways:

  • The interest rate charged on bilateral loans under the first package will be reduced to 150bp over Euribor. Our understanding is that this reduction will apply retroactively, implying that previous interest payments will be reduced, allowing greater relief (the debt level will be 2.8% lower by 2020, according to the official statement). Incidentally, this raises the possibility that Portugal and Ireland will also seek a reduction in their borrowing terms from the official sector.
  • The ECB will receive new ISIN bonds at par in lieu of its SMP holdings, estimated at around EUR40bn face value and marked at 70c. An intra-Eurosystem transaction between the ECB and national central banks will release anticipated profits to NCBs and hence to governments for debt relief. Admittedly the Eurogroup statement is pretty sketchy on this. But that would not imply a reduction in the debt coming from the SMP holdings themselves, but rather only from the profits. Moreover, Eurosystem national central banks will contribute all income generated by their holding of Greek government bonds through 2020 (the Bank of Greece owns around EUR 8bn worth of GGBs).

As far as the private sector is concerned:

  • According to a statement by the Steering Committee of the Private Creditor-Investor Committee for Greece (PCIC), existing bondholders will be offered the opportunity to enter a ‘voluntary’ deal envisaging a face value reduction of 53.5% (hence higher than the 50c announced since October). Old securities will be exchanged into a portfolio of ‘short-dated’ EFSF paper, with face value of 15c, and a notional 31.5c of Greek government bonds issued under UK law and pari passu with other liabilities. The new GGBs securities will have maturities ranging between 11 and 30 years, replicating an amortization of 5% per annum commencing in 2023. The securities will pay a step-up coupon of 2% from Feb 2012 to Feb 2015; 3% from Feb 2015 to Feb 2020 and 4.3% from Feb 2020 to Feb 2042 (the weighted average coupon is 3.65% over the full 30-yr period, and 2.63% over the first 8 years). The effective NPV loss depends on the discount factor applied to the Greek cash flows after the deal. We make it close to 80c. Separate securities linked to future Greek GDP will also be offered, but the valuation of this component at this stage remains uncertain and in any case small. An exchange transaction will be launched in early March.
  • The PSI results will determine the exact size of the official sector’s contribution to the second bailout package. A low participation will likely entail the triggering of retroactive collection action clauses (CACs, to be introduced by national legislation this week), and thus activate CDS contracts. The breakdown between resources provided by EMU member states (through the EFSF) and the IMF will be decided in mid-March. It is understood that the IMF’s share may be lower than the 30% in the first three EMU programs.

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Ghordius's picture

Success. Success! Success?

anyway, something with success in it


"...with bondholders now certain to throw up..." poor, poor darlings, bought the stuff two years ago at a fire-sale discount and now they don't get their top euro? my heart bleeds, particularly for the issuer of the CDSs on this debt...

ndotken's picture

From USA Today:

"On top of the new rescue loans, Athens also will ask banks and other investment funds to forgive it some €107 billion ($142 billion) in debt, while the European Central Bank and national central banks in the eurozone will forgo profits on their holdings."

Ya gotta love how the MSM describes the private sector being fucked over (forgive it some $142 billion) while the central bankers get bailed out (forgo profits) ... bunch of complicit assholes

Harlequin001's picture

'Goldman's Greek Deal Summary: Increased Likelihood Of CDS Trigger And CAC Use Will Lead To Volatility'

So, not total economic failure then? yet...

French Frog's picture

"In other words, since we now know that the March 20 bond payment will be part of the PSI, is last night's farce merely a way to avoid giving Greece a bridge loan, and putting its fate in the hands of creditors, which as we noted back in January is a lose-lose strategy?"

You guys are good (anyway) and will look even better if events unfold that way

LongSoupLine's picture



yep, and let's see how "robust" future bond sales are throughout other PIIGS now that this bondholder asspoke with a telephone pole has occured...

Harlequin001's picture

The visual representation of your statement is quite astonishing...

ndotken's picture

The other Euro central bankers will insure that future bond sales are covered ... and why not if your principal repayment is "guaranteed" by fucking over the private sector ... beware buyers of UST's ... the Bernank will be watching the outcome of this closely 

Ghordius's picture

not enough - BAN that hideous stuff

of all monsters derived from deregulation, they are the worst

disabledvet's picture

careful what you ask for....

trebuchet's picture

oh come on folks, they ve made such good progress they are now using DEBT to GDP ratios with single decimal places! 


That shows ACTION, COMMITMENT!!!! 

Ghordius's picture

yes, this would make banks more vulnerable to their own folly, instead of getting them chained together in this "collective TBTF madness"

I'm asking for a functioning banking system - the opposite is not careful

Harlequin001's picture

'a functioning banking system' - that would be like venture capital funds wouldn't it, with venture capital risk.

Doesn't seem like the banking system of today in which one is guaranteed to lose one's money.

At least venture cap had a chance of making something...

Ghordius's picture

did you put your US glasses on? American banks are not the only ones in this world and this world is not the only one in history

no, venture capital funds was definitely not on the top of my mind

trebuchet's picture

Private equity?

oh you mean the only other banks left - the central banks!

DormRoom's picture
"you know how the ECB, when dealing with Greece, is kicking the can down the road? The can is more like a beer keg. And it's gonna fucking destroy the road ahead"--zerohedge


Stencilling it on a t-shirt tonight.

Irish66's picture

Why do I feel confused?

bdc63's picture

because you're watching a classic greek comedy, filled with jokers and jesters.

if it walks like a default and quacks like a default, it IS a default.  If you as a bondholder bought insurance to protect you from a default, you would certainly expect that insurance to kick in LONG before discussions of 53% haircuts were bandied around.

nothing is as it seems anymore -- or in this case, as it is contractually obligated to be ...



Dead Canary's picture

Pardon my ignorance, but doesn't the presence of CDS on ones balance sheet counter the crappy bonds and make you look healthier? On paper anyway.

Hugo Chavez's picture

Looks like the deal will go through, at least this time.

The greeks seem willing to let the check writers have comolete budgetary control and use escrow for bond payments.

The greeks have sunk so low in their beggar status that the troika will take over comolete budgetary control. Greece no longer needs to go throufh the motions of pretending to establish a budget.

trebuchet's picture

Dont be so sure it goes through

Head winds : will Greece = disorderly default?  

answer: still up in the air since PSI is still to be signed. It took them 5 months to get from 50% haircut in principle to 68-70% haircut and now they need to get to 75% plus coz a bunch of peoplez sitting around a table last night said so.... right so Greece, in all its miraculous speedy delivery is going to deliver this by march 8. 

Its doable, but could get unstuck. 


Yes greek politicians have signed up to anything and everything. I heard this morning that Greek GDP had to grow next year by  3% ( or was it 2.85% ???)  to get on track and in a few months (april post PSI deal assuming its done we will hear how greece has miraculously beat everyones expectations and gone back to work and turned out stunning GDP growth. 

With troika sitting in athens, when they find out more slippage what will they do? ask the bondholders to take another 20% off the remaining 70%? Rectroactively?



Robslob's picture

Private Creditors: "Losing"!

Greece People: "Losing"!

Banks: "Winning"!

Governments: "Winning"!

Ghordius's picture

and how many "private" creditors are there? do you know any? the only ones I know bought them in the first through and sold them again for a profit. And how exactly to you think the Greek People are "losing"? They are, but please, be more specific, satisfy my curiosity about your view...

Peter K's picture

Really stretching for the pluses :)

nonclaim's picture

Could standing CDSs be bought out (for a premium?) from holdouts and thus avoid the failure in theory?

[it is still a failure but there's nothing to trigger; tree falling in the forest, nobody hears, etc]

disabledvet's picture

when you gonna at least let me sratch you behind the ears....

disabledvet's picture

to answer your question "all contracts will be null and void once the miliary government takes over." they will operate under a State of Emergency...probably for some time. I did just recieve this video feed of Jamie Dimon btw..."gearing up for his showdown with Angel Merkel" apparently:

Ghordius's picture

ok, ok, another bunch of CDSs lovers. then please explain them to me. If I take insurance on your house without having any skin in the game, how is this not going to make me love the sight of your wife playing with fire? Or helping her?

Insurance is "properly regulated" - CDSs are not. They are pure bets between hyperleveraged (hence playing with other people's money) gamblers. Without proper backing and just for the fun of making profits with other people's money. If you don't realize that CDSs cannot ever be paid and still moan about all the stuff of ponzi-scheme here and ponzi-scheme there than you are really terminally Cognitively Dissonant.

Sounds and walk like a free-market fundamentalist, must be one?

nonclaim's picture

"ok, ok, another bunch of CDSs lovers." Not sure how you got that, but it is way off...

Listen, you may wish as hard as you can that those things didn't exist... but they exist and the problem is real. Since the total amount in play is relatively small compared to the bailout I offered a gray area solution, to buy out the insurance from the holder for a known cost instead of risking a very brittle agreement.

To efficiently counter that or any other proposal you'll need a bit more than an angry rumble of platitudes.

Ghordius's picture

I replied to the wrong comment - pls excuse. Yes, your proposal has the merit of "trying to do something".

I just hope that the counterproposal of banning that stuff gets through. Of all schemes, they are the MegaPonzi Supreme.

Insurance is serious stuff - CDSs are not. Though many don't know the difference between investing and gambling anymore.


If we didn't have the UK in the EU, we would have probably banned them already - just to show the cultural/financial devide...

nonclaim's picture

Ok, we are clear. And I agree that to claim the insurance you must prove you suffered the losses by being a direct holder or by other verifiable means. I think that may be enforceable as it is, depending on the court system of each country that governs that particular bond and/or CDS. We'll see...

bigkahuna's picture

I thought the entire purpose of this prolonged charade was to avoid CDS from kicking in. Once the CDS's start exercising is when we start seeing who is pretending all over again. What gives?

fonzannoon's picture

They will give the bondholders a ferrari and some tax breaks and they will go away. Bloomberg will expose this in 2031.

MFL8240's picture

Whatever it takes to bail out the Jewish Banking gangsters in NYC must take precident to what is best for the taxpayers.

disabledvet's picture

I'm sorry..."is there a difference"? From what i hear the Upstate New York Indian Authority has already labeled this...ahem..."situation"..."The Great Battle of Two Jew." Think "Gensler vs Fleckenstein" only at "Super-bowl level."

MsCreant's picture

I am gonna wear my central banker hat here. If most of the CDS are held by just 5 or so banks, why not just take those banks over and endlessly "bail them out" as the insurance policies are drawn upon? Or pick one and make it a bad bank to go under as it funds all the others through AIG style back door bailouts?

Just asking. 

Poor Grogman's picture

Too obvious ...

More smoke and mirrors and some more alphabet soup acronyms, and you would be getting very close to a workable long term solution.

Throw in a few thousand high paying public servant positions and some nice bonuses for the big boys while you are at it.

That's the way we run the ponzi nowadays.....

MsCreant's picture

That ain't workin'

That's the way you do it

Money for nothin'

Dicks for free

Hugo Chavez's picture

MUCH MORE difficult to get agreement on burden sharing since the bank liabilities are concentrated in two nations. It would be too easy to argue it was an illegal subsidy and it woyld upset the sheeple to see the money go directly to the banks versus the current indirect route.

MsCreant's picture

You and the commenter above, I want to agree with you. No one is getting arrested for the outrageous shit happening now. When we found out that Italy, Greece, and others lied about their debt load in order to get into the EU, that right there should absolve so many of responsibility. NO ONE IS EVEN SUING ANYONE over this little technicality, never mind going to jail. If dishonest things were done to get funds in the first place, seize the assets of those involved and use those to payout to those who were "conned" under false pretenses into buying bad bonds.

Since the whole things is already a farce, why not go balls to the wall? They just need to come up with a story that most of the people will buy and monetize everything, let it fester on the books and compost, do something with the so called assets, later.

Poor Grogman's picture

Exactly the lie is so big now that market integrity can never be regained.
Meanwhile the path of least resistance beckons to the feeble witted sheeple, eager to be told that the music will never stop.
The only answer is to monetize.
everything else is just scary children's storys.

bania's picture

why do i feel like i'm still on page 9 of Waiting for Godot?

ArkansasAngie's picture

It won't be over till ... what?  Banksters and their politicians are sitting in jail.


Lednbrass's picture

Unfortunately this will never happen.  The closest to justice we will ever see is some of them going down in a total system crash. In order for those parasites to let loose, the host is going to need to have a near death experience.

slewie the pi-rat's picture

apparently, the CDS will now be used to "redeem" the bonds back to the banksters who will then mark them to unicorns or zombie excrement or something

tiny little unicorns;  see them dance in the palm of your hand!

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