Greek CAC Trigger Walk Thru

Tyler Durden's picture

While we have done our best to explain what the implications are of the actions of the various parties in the Greek/German/ECB/Euro swap/default/CAC/PSI/Austerity events, it is perhaps worth one more try to address how we see this playing out and exactly what the ECB just did. The weakness in GGBs today along with the rise in the cost of Greek basis packages (a hedged bond trade that looks to profit from a credit event or compression) suggest markets are beginning to wake up to reality but the dead-currency-walking behavior of the EUR (and ES) since last night's close suggests many remain sidelined or have all their chips on the constantly-tilting table.



From Peter Tchir:

Here is how is see it playing out and an explanation of what the ECB has done.

If there was a bond with a billion outstanding and the ECB held 200 million and private investors held 800 million it would make the psi awkward. It would be offered to everyone, but the best case scenario was 80% participation for that bond. So collective action clauses would have had to have very low thresholds (I bet the ECB owns 50% of some issues).  It also was hard to make a law that forced holders to participate but excused the ECB. If Greece stopped paying on bonds, it would again be more difficult to pay some holders of a bond and not others.

So in any orderly evacuation of a sinking ship, women and children first. In this case the ECB. There should now be two bonds outstanding. Own for 200 million and the other for 800 million. The ECB will own 100% of the new bond. Those bonds will have special rights and documentation. I don't think the ECB will take an accounting gain (or loss) on the exchange. They will keep it marked "at cost". The fact that maturity and coupon is same as original bonds makes that an easy argument. So this does nothing for Greece. Absolutely zero. TheECB may cut them a check or give them some debt relief but that would be separate. This does none of that. It may or may not have already been done (though somehow I suspect they view it as done but have actually figured out how to legally do it).

So the remaining 800 million of the original billion are all owned by private investors. Will someone challenge the legality of the swap? Can Greece really offer the swap only to the ECB? Possibly, but someone may object. The march 20th bond holders don't need to win the ruling, they just need to delay until march 20th to see if the troika flinches and pays them out at par. So I would expect someone to challenge this swap. Especially if the ECB holds any English law bonds. There are rules for tenders, etc., specifically to ensure fair treatment. While this swap may seem innocuous someone may challenge its legality.

Assuming the swap is done then the troika will start unleashing the weaponry on this 800 million (their 200 million having been nicely barricaded).

Bond holders will be given an offer to exchange old bonds for new bonds. The terms of the new bonds and the exchange ratio will be set. It sounds like investors will have 10 days to make a decision. I would think a lot of banks immediately make public statements that they agree to the terms. They will want to be seen as showing support and getting a big participation number early. Holdouts have no incentive to say or do anything. Delay is their game plan. Expect a participation rate of 85-95% very early. The march bonds will likely have the lowest participation rate as that is the big bet. Other bonds will vary but any that were ideal as a basis package will also likely have a decent holdout percentage.

Supposedly Greece will pass a law making all the old bonds subject to collective action clauses. They have obviously decided it is legal to do this, but time and again they haven't really done their homework. This could be another one of those cases. I would expect some holders of the march debt to challenge this law. I have no clue about the court system in Greece but have to believe someone will try and find a way to challenge a law that applies retroactively. I doubt they win but it is worth a try since the game is to delay until march 20th.

Assuming the law is in effect and the psi deadline arrives, there are 2 possible outcomes.

  • 100% of the holders of each and every bond agrees to the PSI. In that case the CACS aren't used and there is NO Credit Event.
  • More likely there is one holder of the "default requirement" amount of bonds who holds out (I believe the amount is 10 million, but have to double check that).  So in our example 785 million of bonds agree and 15 don't agree. Then Greece CAC's them and they too get new bonds. This IS a Credit Event.  CDS would be triggered.  This seems the most likely case.

In the end every private holder will write-off 50 percent permanently and those that live in a mark to market world (fewer and fewer live in that world in Europe) probably lose another 20 points or so. CDS will be triggered and we will be told how great it was that Greece avoided a default and that it is an isolated case. All the debt banks issued with a Greek government guaranty will likely be left alone (it isn't the real world anymore).

Is that scenario priced in?

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Ancona's picture

Sooo......they're fucked either way.

battle axe's picture

Default. Show the world that you too can tell it to fuck off. I mean what the hell are the Germans and French going to do? How can it get worse?

resurger's picture

ok what about the CDS? 32T worth of Pyrotech...

We have Reached the the corss roads and both of them are leading to HELL, but one is road is longer than the other.

French Frog's picture

This IS a Credit Event. CDS would be triggered

Why do i have the feeling that they will find some clause somewhere that will stop the CDS being triggered....

Alea Iactaest's picture

I've always wanted my Fuck You money!

bobola's picture

French Frog,

My thoughts as well.  Not much different than a big insurance company deciding not to pay a claim on a big loss. 

Just like a Michael Moore doc - choose the outcome and then create the story to satisfy that outcome.



FlyoverCountrySchmuck's picture

When I was much younger, a Black man told me that "Debt" was just FREE MONEY!, if you never intend to pay it back. I never really understood that, until recently.

Can you just imagine how differently this would be reported to the Sheeple if BUSH were President, right now? Hourly doom/gloom stories and breaking updates, yada, yada...

falak pema's picture

Those who make the rules change the rules : regulatory capture of immense magnitude. The man who said Guantanamo was an insult to US values at the beginning of his tenure, has not only not abandoned it and Patriot's act's ugly legacy, he has enhanced it with TSA and NDAA, and it isn't over this return to medieval age.

We are what we do, Nobel or no Nobel. Guantanamolese and NDAA salad dressing is now here to stay. Julian Assange and his spiritual sons have scared the shit out of the world Oligarchy. Prepare for the Big Brother onslaught. Resist, resist, never give in.

The spirit of Tom Paine and Lafayette, sons of the founding fathers, still live on.

Zero Govt's picture

I hear one of the CDS's (not neccessarily a Greek one, but do hope so!) pay-out at 500 to 1

...what financial moron wrote that business?!!


battle axe's picture

Yes resurger, you are right. But the one thing is the CDS has to be triggered, and I would of thought they would of been triggered about 6 months ago, but low and behold they never seem to get set off. I do not know maybe this time, but I get a sneaky feeling that the CDS's will not get activated....

CompassionateFascist's picture

CDS = sucker bait. Will never pay. Doesn't matter. The system is full of dry tinder.

Conrad Murray's picture

Well, they could always fart in Greece's general direction.

withnmeans's picture

Ole Monty Python never gets old, that was great stuff.

SheepDog-One's picture

Greece should have just defaulted a YEAR ago and told the bankers to do their worst, it cant be any worse than this daily clownshow theyve put us thru ever since! 

ekm's picture

2008 all over again. This time a country, not a freaking Lehman.

And the market: Still dreaming COCAINATED EASING.

Those people (PRIMARY DEALERS TRADING DESKS) are hooked on FINANCIAL COCAINE, probably even real cocaine to behave like this.

resurger's picture

Bullish on Influence, Any!

SheepDog-One's picture

Yep! Dont worry! Its all contained to 1 Ouzo bottle!

williambanzai7's picture

Greece is as banany as any banany republic you will find anywhere in the emerging market jungles of the crony globe and the EU is right there with it. 

agent default's picture

I always thought that the US was the reference crony capitalism banana republic of the world, but the EU is really and truly turning out to be well beyond and above that.  We need to come up with another fruit altogether to describe the EU situation.

machineh's picture

Durian -- the stinky fruit!

Uchtdorf's picture

EU gets its marching orders from the City and the Fed.

GeneMarchbanks's picture

It sure does, but not directly. IMF is a huge part of it, I see they're on the hook for only a 10% contribution which means default announcement should be around the corner.

Totentänzerlied's picture

I prefer to think of the EU as one of the larger banana trees on banana-plantation-earth.

Comay Mierda's picture

off topic (sorry)

Troops are going to Occupy DC to support Ron Paul and turn their back on Obummer

Keep an eye on this!

nope-1004's picture

I'm telling on you.  No terrorism allowed. </s>

monopoly's picture

Well this sounds bullish. Will be buying NFLX and AMZN on the default. Perfect set up for DOW 14k.

Imminent Collapse's picture

They continue to make it as complicated as possible, but guess what?  The hedge funds that are playing this game are ready for the fight.  In the end they will do whatever they want to do and the holdouts be damned.  But it is a short term game with long term ramifications.  Russian Roulette.


Send lawyers, guns and money  - Warren Zevon

Non Passaran's picture

Excellent stuff, thank you Peter.
I am certainly hoping some bondholders will call BS on this charade!

Yen Cross's picture

The euro is beautifully positioned for a short. Nothing like a credit event over a 3 day weekend! Amazing how the NQ100 is sorta getting it right.

Mr Lennon Hendrix's picture

I don't know how you FX traders are doing it right now, shit is a mess.  Good luck trading.

the not so mighty maximiza's picture

Man this is depressing I need a pick me up, 

Robotrader where art thou?


Cursive's picture

Is it priced in? I don't know, this has gotten too bizarre and too convoluted to follow.

slaughterer's picture

The event becomes shortable only in March, IMO.  On Monday, a "deal" will be announced, and European markets will blast off.  ES will be at 1380 overnight before Tuesday.  Then we have the 95% participation rate in the PSI anounced the same week very early.  Very public.  Another blast off.  Only after the euphoria of that news fades, and participants start asking about the other 5% will the downward trajectory make itself known as the court proceedings and eventually the CAC is invoked.  Timing is everything here.   

jm's picture

Tell that to the basis risk.  Talk about blasting off.

tobinajwels's picture

So what happens on March 20 or a few days after that?

Conman's picture

Timing is all wrong in your premise. There first needs to be another let down before the ramping continues. So failure on monday to reach an agreement. Then Tuesday all will be solved. That's the pattern.

SheepDog-One's picture

Then what? At some point, someones going to have to take a shitload of losses. They thought 'Lehman' was a disaster? Chump change compared to this mess theyre trying to pass off on someone besides themselves. 

Conman's picture

Release another rumor, stall, print more money, lie.


You know, what they've already been doing.

slaughterer's picture

You could be correct on that pattern of let-down.  It seems to fit the model of conflict and confusion that has increased in frequency lately.  

satan2liberals's picture

Don't forget effect of  LTRO Wed night 2/28/12.


dpr10's picture

so 1380 is not enough now:::;;;))another blast off another one..we should be at 1420 soon...

slaughterer's picture

1420 looks like a great level to short.  :-)

machineh's picture

'785 million of bonds agree and 15 don't agree. Then Greece CAC's them and they too get new bonds. This IS a Credit Event.  CDS would be triggered.'

Others claim that if a CAC majority approves the exchange, then it's officially 'voluntary,' even if the holdout minority objected. Result: perhaps NOT a Credit Event.

This is a vital point which needs to be double-checked. Hell, they could even write it into the Greece's new CAC law, right? Since they're making this up as they go ...

slaughterer's picture

Peter will scour the PSI details no doubt for such participation rate clauses no doubt.  The worst conspiracy theory I have heard though is that the ECB has already secretly bought out the bond holdings of all potential hold-outs.  

POpatriot's picture

That's what i was thinking too.  If its such a small % then why not?  The only downside I see is that a precedent will be set and more hedge funds will play this game and continue to buy Greek bonds with the demand they get paid par. (sounds like Goldman and AIG actually). 

Mercury's picture

It seems like the worst case scenario is if the holdouts get screwed by this deal and CDS is prevented from triggering.  If that happens, going forward,  everyone will dump distressed sovereign debt down to at least the ultimate recovery level of this Greek deal the minute the ECB steps in and starts buying. Plus, there wouldn't be much reason to ever bother again with sov. CDS.

machineh's picture

I'm no expert, but if history is any guide, your worst-case scenario is EXACTLY what will happen. 

Banksters like to win the old-fashioned way: they CHEAT.

Enceladus's picture

is the CDS triggered just on the 15 billion in hold outs? or does the entire deal all unravell?