Greece Set To Default On Foreign-Law Bonds On May 15

Tyler Durden's picture


Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", we said that "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....As anyone who has ever overseen or participated in a bankruptcy process, the biggest trump card one can attain is to build up a blocking stake in a fulcrum security (just ask Carl Icahn) . Because it does not matter who has a majority. What matters is who has 33% + 1 of the vote to block any consensual deal." In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-make whole take out settlement.

Alas, we underestimated the stupidity of the European authorities who in their pursuit of a prompt if messy conclusion to the Greek restructuring, which ended up with a CDS trigger, were left with a tranching of the Greek balance sheet into a ridiculous seven classes, which crammed down the Greek law bonds into yet another separate class, an outcome which will shortly bite the European pre-petition sovereign market (i.e., Portugal, Spain and Italy) in the ass. What we did not however underestimate at all, is the critical value of strong indenture provisions, or, in other words, the willingness of UK-law bondholders to not comply with terms forced down their throat. As reported earlier today by the Greek Ministry of Finance, a whopping 20 of 36 classes of non-Greek law bonds have rejected the nation's attempts to restructure, and now appear set for an epic legal showdown, whose outcome will determine whether or not the UK non-UK law spread will explode, or if the entire European bond market will shoot itself in the foot itself, after all strong indentures appear to be merely a bond prosectus placeholder which will never be honored. Most importantly, we are delighted that UK-law bonds have understood one thing - by being the fulcrum security as we said, they have all the leverage. If Greece thinks it can take them in court and not pay them anything, well that may well be the ballgame for the European bond market.

Bloomberg's take:

Investors in Greek bonds issued under foreign law rejected the nation’s attempts to restructure the debt at talks last week.


In 20 out of 36 meetings, bondholders either turned down the government’s proposal, adjourned the talks or failed to achieve a quorum, according to a press release today from the Greek Public Debt Management Office.


The meetings involved holders of about $26.8 billion of foreign-law notes denominated in dollars, euros, Swiss francs and yen. Investors owning $15.3 billion of securities agreed to a restructuring, leaving $11.5 billion still to be dealt with.


“The key thing with the international bonds is that holders have to vote bond-by-bond rather than in aggregate,” said Thomas Costerg, European economist at Standard Chartered Bank. “That makes it easier for investors to block the restructuring and raises the question of what Greece can do now.”

Which is precisely what appears to have happened. And $11.5 billion is a non-trivial amount in whose favor any European court will ultimately rule. translation: more bailout money from the IMF, or America, will be needed to satisfy the demands of those hedge funds who did not fold like a cheap chair when they too got 'Rattnered' in the early part of March.

Greece’s options include opening talks with holdouts to reach a mutually acceptable compromise, paying up in full or refusing to pay at all, according to London-based Costerg.


Paying up in full would raise the issue of fairness regarding the domestic-law bondholders, while a hard default would make litigation likely,” said Costerg. “The bottom line is that this reminds investors that the Greek crisis and the euro-area crisis aren’t over.”


Holders of a 450 million-euro floating-rate note that falls due on May 15, the closest maturity on the international bonds, rejected the restructuring deal, according to the press release.


The country has a 30-day grace period to make the payment, data compiled by Bloomberg show. How to handle the debt maturity will be an early test for a new government that may be elected as soon as this month to replace Prime Minister Lucas Papademos’s interim administration.

Looks like June 15 will be a very interesting day in the neverending slide down the European insolvent rabbit hole, since the country which has supposedly restructred in a prearranged fashion, will suddenly find itself served with a notice of default by a class of bondholders whose indentures has been violated across the board. That said, we are confident that the end result, for those who bought UK law bonds in the 20s and 30s, will be a par return, if only with a modest delay: a case study which will make all future PIIGS restructurings virtually impossible due to hold outs finally getting the hang of it.

As for Greece: congrats on the first-moved advantage. Too bad nobody else will have that now.

Full list of bonds that want nothing to do with coercion, as well as those who got Rattnered.


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Mon, 04/02/2012 - 08:08 | 2309165 GeneMarchbanks
GeneMarchbanks's picture

'If Greece thinks it can take them in court and not pay them anything, well that may well be the ballgame for the European bond market.'

Well, certainly that would mark the end of one era and source of funding. Wouldn't be the end of Earth though.

Mon, 04/02/2012 - 08:12 | 2309173 Colombian Gringo
Colombian Gringo's picture

No, the Greeks will be 'bailed out' and robbed by the banksters, who will extend and pretend whilst bleeding Europe Dry.

Mon, 04/02/2012 - 09:29 | 2309326 stocktivity
stocktivity's picture

Yep...just continue the printing. It's all Bullshit!

Mon, 04/02/2012 - 10:11 | 2309451 GetZeeGold
GetZeeGold's picture



The June default will make the May default look like peanuts.


Mon, 04/02/2012 - 17:47 | 2310964 StychoKiller
StychoKiller's picture

I losing track here, are we on Act 3, Scene 4, or Act 4, Scene 1?

Mon, 04/02/2012 - 15:42 | 2310425 AlvarezEarnestine7
AlvarezEarnestine7's picture

my best friend's sister makes $63/hr on the computer. She has been out of work for eight months but last month her pay was $18250 just working on the computer for a few hours. Read more on this site...

Mon, 04/02/2012 - 08:12 | 2309174 4realmoney
4realmoney's picture


Mon, 04/02/2012 - 09:43 | 2309359 GMadScientist
GMadScientist's picture

Can you see my finger?

Mon, 04/02/2012 - 08:56 | 2309245 SheepDog-One
SheepDog-One's picture

No, all humans on earth could be vaporized in an instant and the earth would go on just fine. Of course human beings arrogance makes them THINK that their fake bonds make the earth revolve around the sun. 

Mon, 04/02/2012 - 10:14 | 2309461 bank guy in Brussels
bank guy in Brussels's picture

Although ZeroHedge has covered the huge profits made by vulture groups going to court against countries with defaulted bonds, the litigation coming out of the Greek bond default may not go very well, despite the precedents when investors were suing more 'helpless' and systemically unimportant countries, as with bonds from Argentina.

The Greek bond legal cases can have a large systemic impact on the IMF, the Fed, and the whole Western banking system, and the judges in the developed world are very likely going to handle these cases differently.

Many hedge funds etc. will make the mistake of filing lawsuits in the US.

When the fact is that, US federal judges are directly on the bribery payroll of the big US banks and oligarchs, they come out of the same law firms representing Goldman and JPM and America's wealthiest people.

Before the US judges do anything, they will
- (a) Check with the US political oligarchs, and get instructions from the same oligarchs telling Ben Bernanke what to do
- (b) Check with the Wall Street banks etc.
If (a) and (b) approve, only THEN will the US judges welcome bribes from the hedge funds, to rule in their favour against Greece and etc.

In terms of the law itself, hedge funds etc. would do better filing legal actions in the UK, or in Europe, where there is much less judicial corruption and bribery, although the amounts you can win are theoretically smaller.

However, UK and European judges will also hesitate to act in ways that would de-stabilise the European banking and sovereign debt systems. They also will tend to stall it, or find some kind of force majeure theory to avoid causing destructive havoc.

Not to mention that, by the time these cases get to maturity in a couple of years, maybe the whole Western bond market and banking system will have blown up, after the Americans will have started World War III.

Or in the end, the ECB can just inflate the currency so much, they basically pay off the bondholders with trillions of Zimbabwe dollars.

Mon, 04/02/2012 - 14:50 | 2310305 disabledvet
disabledvet's picture

I agree with you...which is why I with health insurance in the USA and what even defines "a contract" anymore...this matter should be handles by the United States Supreme Court.

Mon, 04/02/2012 - 08:04 | 2309166 The Axe
The Axe's picture

No one cares about greece,,,,move on..fully discounted roadkill

Mon, 04/02/2012 - 08:20 | 2309186 maxmad
maxmad's picture

Greece... The gift that keeps on giving!!!  THis is bearish!!!

Mon, 04/02/2012 - 09:08 | 2309280 Eclipse89
Eclipse89's picture

But wasn't it fixed?

Mon, 04/02/2012 - 10:15 | 2309464 GetZeeGold
GetZeeGold's picture



Yes......for a day.


Mon, 04/02/2012 - 08:13 | 2309177 battle axe
battle axe's picture

Finally, someone is calling out these ass clowns, showing what a farce this whole thing is....will it change anything, probably not. 

Mon, 04/02/2012 - 08:55 | 2309242 unununium
unununium's picture

Foreign-law bondholders will get paid off at par by sucker taxpayers, dollarholders and euroholders.  Did I miss something?


Mon, 04/02/2012 - 08:24 | 2309190 rsnoble
rsnoble's picture

I've discovered I don't have the patience for collapse, lol.  That's the problem with bankers and crooks having a firm grip on everything.  They'll drag you thru hell for decades trying to stay in power and protect their own sorry asses regardless of what it does to the country or it's people.

Mon, 04/02/2012 - 08:28 | 2309193 ZeroPower
ZeroPower's picture

Litigate until your eyes bleed from the paperwork. 

Such a mixed bag in EU equities and credit today. Equities flat to slightly down as of just now, credit fairly wider... EURUSD not hanging in despite overnight bullish gap.

Mon, 04/02/2012 - 08:46 | 2309226 slaughterer
slaughterer's picture

The falso rumor about the BuBa not accepting certain EZ sovereign bonds as collateral was what took the EZ indices down 1% in a few minutes.   The cartel obviously wanted a flat open for 9:30 am EST and they got it. 

Mon, 04/02/2012 - 08:31 | 2309198 Dr. Engali
Dr. Engali's picture

Has anybody seen the new squawk box commercial ? Basically saying that if investors don't watch squawk box they make bad investment decisions and end up launching a ponzi scheme, then getting roughed up in an interrogation room. Don't get roughed up in an interrogation room watch squawk box.

I think it's hillarious they want you to participate in a ponzi scheme to avoid being arrested for starting a ponzi scheme.

Mon, 04/02/2012 - 08:39 | 2309212 Cast Iron Skillet
Cast Iron Skillet's picture

Sometimes you can hide things best in plain sight.

Mon, 04/02/2012 - 09:48 | 2309384 GMadScientist
GMadScientist's picture

When you get poor marks in maths you get an MBA.

When you get an MBA, you go to work in the FIRE sector.

When you you go to work in the FIRE sector, you end up a sell-side douchebag.

When you're a sell-side douchebag, you pimp to momos.

Don't pimp to momos, go back and study your maths.


Mon, 04/02/2012 - 19:31 | 2311253 kalasend
kalasend's picture

Don't know wtf you are talking about. Try applying to biz schools(the real ones, not the ones that essentially sell you a diploma) with sub-700 at GMAT quant.

Look, the fact that they are crooks and vampire squids desn't mean they are bad at what they do. 

Mon, 04/02/2012 - 08:42 | 2309218 Poor Grogman
Poor Grogman's picture

The Greeks have been living it up for so long they have forgotten HOW to default

Mon, 04/02/2012 - 08:47 | 2309227 slaughterer
slaughterer's picture

Whoever remembers Argentina, will know how long this litigation will drag on.    

Mon, 04/02/2012 - 08:49 | 2309232 espirit
espirit's picture

Until then, it's "party on" in Athens.

Kicking the can is a national pastime, and not only in Greece.

Mon, 04/02/2012 - 08:53 | 2309233 i-dog
i-dog's picture


Mon, 04/02/2012 - 08:51 | 2309235 eddiebe
eddiebe's picture

Please no, not again!

Mon, 04/02/2012 - 08:53 | 2309238 dannyboy
dannyboy's picture

*Looks like May 15 not June 15

Mon, 04/02/2012 - 09:01 | 2309253 NuYawkFrankie
NuYawkFrankie's picture

Re. Greece Set to Default.. on MAY 15

Which - in todays financial climate - is about 5 light-years away....

Mon, 04/02/2012 - 09:00 | 2309254 JohnKozac
JohnKozac's picture

Game on!

Step1: threaten default (world will system will will 'harm the public');

Step2: pretend to worry;

Step3: solution = CTRL+PRINT;

Step4: bailout bank friends who hold the junk;

Step5: handout Bonuses.

Step6: wait three months, then repeat Step1......

Mon, 04/02/2012 - 10:15 | 2309463 NERVEAGENTVX

wow, a thread about greek default, and only about 30 comments or so. Looks like the only thing fading faster than LTRO is interest in greek default.

Mon, 04/02/2012 - 10:27 | 2309511 Grimbert
Grimbert's picture

No such thing as UK law. The UK is four countries.

England and Wales use English law. Scotland uses Scottish law. Northern Ireland uses Northern Irish law.


These bonds are under English Law. Camp Zeist in the Netherlands became UK territory under Scottish law for the Lockerbie trial.

It's a small point, but it does irritate when Americans seem to equate UK = GB = England, when all 3 are different things. 

Mon, 04/02/2012 - 11:28 | 2309690 Missiondweller
Missiondweller's picture

So is May 15th the large CDS "trigger event" we are looking to?


The last CDS trigger even was a non-event.

Mon, 04/02/2012 - 15:27 | 2310380 Watson
Watson's picture

If you own an English law Greek sovereign bond which does not pay on time, why can't you:
1. Go to an English court and get a declaration of default;
2. Identify some Greek sovereign asset also held under English law (say the Greek embassy in London);
3. Use the declaration of default to force a court-ordered sale of the embassy for the benefit of the bondholders.

What am I missing?


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