As Greece Deems 66% CAC Bondholder Acceptance Sufficient, Has It Threatened To Scuttle Its Bailout All Over Again?

Tyler Durden's picture

According to the Wall Street Journal, the Greek threshold for "successful" CAC passage is now expected to be just 66%, far below the 95% discussed yesterday. Says the WSJ: "The Greek government is aiming for a minimum participation of least two-thirds of bond holders in a planned debt exchange, a finance ministry official said Tuesday, with a formal offer on the exchange expected to take place by the end of this week. The deal, which aims to erase some EUR107 billion from Greece's debt burden, is part and parcel of a related EUR130 billion loan deal agreed to by euro-zone finance ministers in the early hours of Tuesday." As was extensively explained in our subordination piece from January, this is the number of bondholders that have to agree to the Collective Action Clause, which if passed successfully, would avoid a CDS trigger as it would be then deemed voluntary by ISDA who are more than happy to avoid any type of contagion causes by CDS triggers - they are after all a banker-owned organization. We ignore how a 66% participation rate is anything but a majority, let alone supposedly consensual. There is a bigger issue. And unfortunately by the Greek's actions, it shows they are in process of abrogating even more contractual rights in the form of foreign (UK-Law) covenant agreements. Either that, or the country is about to pay par to all UK-law bonds, both outcomes that threaten to put the entire second bailout in jeopardy.

As a reminder, and as we pointed out in January, "where the process falls squarely on its face, is the fact that Greece also has issued a modest amount, somewhere over €25 billion face, in bonds issued under UK-law. These are bonds which already have Collective Action Clauses and which as Stephen J. Choi and Mitu Gulati explain, come in two flavors: "Those that were issued prior to 2004 contained CACs that allow holders of 66% or more of an issue to modify payment terms in a manner that would bind all other holders. The bonds issued after 2004 require the consent of holders of 75% or more of an issue." Incidentally, this is where the Greece has the upper hand argument fails because while Greece can force local-law bondholders to do pretty much anything, it has no chance of doing that if a given hedge fund cartel has already built up a blocking stake in the UK-bonds. Choi and Gulati go on to state the obvious: "Obtaining approvals from between 66% and 75% of the bonds is likely to be difficult." And this is where the game gets interesting, because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security. And since the notional outstanding here is tiny, it is quite easy to build up a blocking stake in the bonds and to obtain full control of the process, especially since the ECB appears to have been building up its own stake in local-law bonds."

In other words, if Greece does rule that the 66% threshold is enjoining, it means that a collective class of UK-law bonds has just had their covenant protection stripped, despite them being issued under UK-law, something which will set the entire sovereign bond market on fire, as it takes the threat subordination to a whole new level. In yet other words, a hold out class is no longer a hold out class, even if it controls more than 25.1% of the strong-law protected class. Either that, or hopefully more likely, instead of starting an epic litigation of UK-law bonds, Greece is simply preparing to pay par to the minority of UK-law holders, which are expected to block the deal, sue, and hold out for par as Greece will be subject to UK law (in which case keep an eye out on the price of the UK-law bonds which comprise half of all outstanding 2016 issues).

And while UK-law bonds may be de minimis, or between €25 and €40 billion of the total as estimated before, this is still a massive amount when considering that any difference between the non-UK law bonds and par for this class could amount to an additional €20-€35 to the barely agreed upon €135 billion rescue package.

So have the creditors once again succeeded in pulling a fast one on Greece which continues to stun the world with its unbelievable misundestanding of bond law?

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trav7777's picture

this is all utter bullshit, bitchez

GeneMarchbanks's picture


We've known CDS to be bullshit but now the bond markets are competition. 

Maybe it's all bullshit.

nope-1004's picture

So have the creditors once again succeeded in pulling a fast one on Greece which continues to stun the world with its unbelievable misundestanding of bond law?

Been my contention all along.  No way big money is ignorant about who has the leverage.


The Big Ching-aso's picture



I'm looking to buy a bond that pays me shit for 30 years so before it reaches maturity I'll have buyers out the ass.

macholatte's picture

The rules will be changed as TPTB decide.



Some newspapers are fit only to line the bottom of bird cages.
Spiro T. Agnew

So it won't be a surprise when the Greek default actually happens and we expect it one way or the other to be relatively soon.
Lucas Papademos

Is it possible that my people live in such awful conditions? I tell you, Mr Wheatley, that if I had to live in conditions like that I would be a revolutionary myself.
King George V

 I am the State. It is legal because I wish it.
Louis XIV


SilverRhino's picture

 I am the State. It is legal because I wish it.  - Louis XIV  / Bernanke / ECB / EU / USA



bdc63's picture

Noth'in like making the rules up as you go along ... 95% - NO!, make that 75%.  On second thought, make it 66% ...

Everytime I think this can't possibly get any more ridiculous, I'm proven wrong ...

JPM Hater001's picture

What I would like expplained to me is why anyone would voluntarily agree? If if just let them default doesn't my CDS make me whole?

bdc63's picture

well, since the bank that issued your CDS gets to determine what constitutes a "default", no.  But assume that they did decide to call it a 'default', then, yes ... but then your bank fails, so ... looks like you're screwed either way.

clear as mud?  ;)  ... listen to this for a beter answer to your question:

ilion's picture

Could somebody turn off the Matrix? I want out.

redpill's picture

Here, take this with a glass of water.  See you in the morning.

carbonmutant's picture

Does that mean the "Future will be different tomorrow"?

CPL's picture

<jazz hands!>


And yes, bullshit it is sirah

DosZap's picture

This HAS GOTTEN VERY OLD...................the Greeks are playing them like $2.00 hookers.

bdc63's picture

Ya think? ... to me it looks to be the other way around.  Greece holds all the cards, they just haven't come to that realization yet ... but when they do, watch out.  This version of the European Flu is going to be VERY contagious.

GeneMarchbanks's picture

<---- New Avatar, Glitchez!*

* Update: no longer the case


Convolved Man's picture

^ ^ v v < > < > b a start

Anonymous visuals mode.

SemperFord's picture

Contra was the shiznit back in the day, I remember jumping up the waterfall level ASAP as it would kill my friends and piss them off, ohhh the good old days when gas was less than a dollar a gallon :)

Joebloinvestor's picture

As I have said, the "contagion" that the ECB seems to be so deathly afraid of, will be started by the ECB itself.


oogs66's picture

And they want to privatize some of their assets? Who the hell will buy anything from them that can't be moved offshore

battle axe's picture

Default any time this year....PLEASE!!!

Silver Dreamer's picture

I have no money to be made from a default, so I'll take all the time I can get before the dominoes start to fall.  May it take many more years for this global ponzi scheme to come crumbling down!

riphowardkatz's picture

I want a deflation scare so I pick some stuff up on the cheap. A greek default would be just perfect for this. Will have to wait a few more months and accumulate some fiat. 

silverserfer's picture

Does Veagas have a line you can bet on soverign defaults?

SilverTree's picture

Were all stars now ~ in the dope show

battle axe's picture

Zerohedge go boom?

Silver Dreamer's picture

Who pwned Zerohedge? We're all bagheads now, and I briefly had a "you're not authorized" error.  The comment window is also effed up.

GeneMarchbanks's picture

That reminds me, much thanx to Durden & Team. See you on the other side ...maybe.

split4to1's picture

Lol doesn't seem like markets care too much about greece news Greece Deal Is Done, Does The Market Even Care?

tobinajwels's picture

I luv Zero Hedge however I am not as knowledagble as some of the other readers. Could someone please explain what exactly does this mean? Are we talking a defualt on March 20, 2012. I am still confused? Any thoughts would really be appreciated.

ziggy59's picture

Da Fault? Da Fault is all ours... For putting up with this sheeeit for decades...

NotApplicable's picture

Well, I am not knowledagble either, but I'd guess that it means no one will know.
Or, as I learned in the Marines, Semper Gumbious! (Always Flexible)

Gief Gold Plox's picture

I am basically a total noob, especially when it comes to sovereigns, but from what I've learned here Greece has been done for since the whole damn thing began. What the ECB is doing is prolonging the inevitable, while trying to rescue mostly it's member countrie's banks while trying to get the politicians re-elected without fucking up the Euro too much. As well as you can tell, they're failing. The only real question now is how much worse will the outcome be.

As per your March 20th question, I don't know. I get the feeling they'll think of something to save them this time around and then default while most people are on summer vacation.

tobinajwels's picture

Thanks your words make sense!

oogs66's picture

And they are trying hard to make you think retroactive rule changes and a 50% write down isn't a default :D

JPM Hater001's picture

Cac means the owners of the debt agree to take a loss. But it's voluntary. They will get new bonds and go forward.

They need 2/3 to that would reduce enough debt to make it theoretically manageable. This, of course, is untrue.

A CDS is insurance on your bond. If they don't take the cac or rather if enough don't then theoretically they default on the 20th when 30 billion in euro denomination get handed in for redemption...someone could show up and help...which is what I think will happen.

That way this gets extended into oblivion...unless Greece comes to its senses and just defaults...

bdc63's picture

"That way this gets extended into oblivion ... unless Greece come to its senses and just defaults..."

Correction:  That way this gets extended until this summer when Spain and Italy become the problem, and there isn't a sugar daddy in existence with big enough pockets to come to the rescue of that clusterfuck.

hyperbole2000's picture

10% of the Greek bonds ($20B of $200B - don't quote me) use UK as the venue for dispute resolution and explicitly state that if 75% (one series) or 66% (second series) of the bondholders agree to a haircut then the remainder of the bondholders can be forced to take the haircut. 75% of $20B is $15B which is the dollar amount hedge funds have been collectively hunting down and accumulating so as to control the haircut negotiations. The clueless 9to5 ECB bureuacrats are oblivious to the tactical error they are walking backwards into. The hedgefunds can even leverage their negotiation strength to impact the Greek venue bonds. Call it Custard's Last Stand, or the Maginot Line, or from more recent history the Mother of All Battles. Greece was being cute using derivatives to hide thier debt to enter the Euro. They who live by derivatives die can also be wiped out by derivatives.

Dick Darlington's picture

Popcorn machine seriously overheating here. Thanks for yet another great post ZH!

ziggy59's picture

The Final Dilution Solution Part 27. ..this is Groundhogs Day Meets FUBAR

alexanderstollznow's picture

the lead article is all very interesting in a technical, legalistic way, but it is completely missing some important realities in 2012.  there is precisely nothing a private party, feeling legally aggrieved, can do about the actions of Greece.  so it really doesnt matter what is the letter of the law on the subject.  the whole thing is operating with an incidental relationship with legality anyway.  bondholders, i am sure, are well aware that they are lucky to be getting back anything at all, and none but the utterly stupid will try to kick up some legal fuss about any aspect of it.  why do you think the IIF has 'negotiated' a 73.5% NPV loss?  i dont think there will be any epic bond litigation in the UK, and i dont think Greece's advisors are ignorant of bond law.  they are just stuck in an Andean plane wreck, and eating human flesh to survive.

as one does in such difficult situations.

Tyler Durden's picture

Well, if one assumes that the modern world can live without contract law between private parties, then yes. Otherwise, as Bill Gross cautioned...

GeneMarchbanks's picture

Larry Fink totally not worried. We need more Pesto Bonds!

Rainman's picture

Precedent meets contagion....who coulda saw that comin ?

alexanderstollznow's picture

the ECB! and for now at least, 'contagion' appears to be the last thing on investors minds.  no doubt you have seen the collapsing spanish and italian auction yields in recent weeks.

alexanderstollznow's picture

that is not actually true at all.  this is not the end of the enforcement of contract law, just like it isnt the end of anything when a country defaults.  there is no legal precedent involved either.  nor is Gross' statement true. he means 'could be taken as risking the subordination of all holders of european sovereign debt'.  it is entirely a practical matter of whether or not it is perceived that way.  judging by the way investors have been hoovering up spanish and italian debt since the LTRO, with more cash coming next week, it would appear that they are not too worried.  in reality, bonds will continue to be honoured as they always have done.  some collateral damage along the way wont make any fundamental change. 

Global Hunter's picture

anecdotally I have moved to retail Financial Services from Institutional in the last year and I am noticing a growing market for "alternative" investments by otherwise unsophisticated retail investors. I'm talking about investments that do not trade on exchanges or that are purchased through banks or insurance companies.  I'm sure its all unrelated to what has been going on since 2007, or even the crash (sarc).

The wave is picking up and you won't get buried here today in February 2012, but when the music is over...turn out the lights.