Moment of PSI Truth

Tyler Durden's picture

Today is supposedly the day. The initial deadline for Greek PSI will occur later today (unless of course it is extended somehow - but will be released here) and while CAC activation (and hence 90% participation) is the consensus most likely outcome for bonds under Greek law (but not for all bonds under English law) - which the market appears to be very comfortable with given overnight trading - there are still risks, as BofA notes, that a number of low risk but high impact events unfold with extremely negative connotations. Clarifying expectations and market implications, it does seem that while BofA is a little more sanguine than us on this initial deadline, that the market's complacency is extremely high.


BofA: PSI participation

The Greek PSI participation is supposed to be announced tomorrow, at 8am Athens time, on Summarizing views that we have discussed in recent reports:

  • The most likely scenario is activation of Collective Action Clauses (CACs) for all bonds under Greek law – about 87% of the total. We expect that PSI consent for these bonds to be above the 66% threshold required to activate CACs. Assuming total PSI participation is below 90%, we do not expect the IMF-ECB-EU Troika to increase the total size of the new Greek package in order to avoid activating CACs. Note that CACs will be activated for all bonds under Greek law together, as the activation threshold does not have to be reached separately for each bond.
  • However, CACs may not be activated for all bonds under British law – about 10% of the total. Activation of CACs in this case will be decided on a bond by bond basis, during bond-holder meetings for each bond at the end of March and early April. As PSI participation for some of these bonds may not reach the threshold to activate bond-specific CACs (in some cases as high as 75%), some of them may be repaid in full.
  • A small PSI participation for the bonds under British law is not a problem for the success of the PSI, even in the case that CACs cannot be activated for some of these bonds. Activation of CACs for the bonds under Greek law and a small participation for the bonds under British should be enough to bring the overall PSI participation to the target of above 90%.
  • About 3% of the PSI eligible bonds are bonds issued by state owned enterprises, which although have no CACs, are within Greece and are expected to participate.
  • The only PSI scenario in which CACs are not activated is if participation in the bonds under Greek law is almost full, bringing total PSI participation close to 87%, and participation in the bonds under British law is more than 50%, bringing total PSI participation to above 90%, on a voluntary basis. In this case, activation of CACs for bonds under Greek law would not bring any large savings, while it may not be possible to activate CACs for most of the bonds under British law. Any holdouts will be repaid in full, assuming there is not another debt restructuring in the future. Such a “free-riding” may be politically unpopular, but we believe that the Eurozone authorities may still prefer to avoid a credit event in a member country if they have a choice.
  • The worst case scenario is if consent to activate the CACs on the bonds under Greek law is less than 66%. This is a low probability event, in our view, as consent to activate CACs is likely to be well above the voluntary PSI participation. To activate CACs, Greece needs the consent of 66% of those who reply to the exchange offer, provided those who reply are more than 50% of the total debt-holders. Those who tender their bonds – participate in the PSI – give their consent automatically. Those who don't tender their bonds will most likely also consent to activate CACs, because they should still prefer the PSI haircut from what could be a larger haircut outside the PSI. Those who don't reply to the offer don't count, but will be subject to the same haircut if CACs are activated.

Market implications

In our view, an orderly default in Greece should be already priced in. An orderly default includes triggering of CDS contracts and enforcement of the PSI scheme to all debt-holders for bonds under Greek law and some for bonds under British law, within an IMF program, funded by the new aid package. In contrast, a disorderly default would take place if the March 20 debt maturity is missed, or the new program with the Troika is not approved. CDS spreads in Greece have increased sharply to record levels following the country’s recent downgrade to selective default, suggesting a very high probability of a credit event (Chart 1). Although CDS spreads in the rest of the region are also increasing, they seem to move independently from Greek CDS spreads.

Activation of CACs and triggering of CDS in Greece could even have a positive market impact, at least in the short term. Although we do not believe that PSI the scheme ensures debt sustainability in Greece, it buys time and removes the risk of a disorderly default, at least before the elections in early May.

Some have argued that triggering CDS in Greece could support sovereign markets in the rest of the periphery, but we don’t consider this to be an important channel. In theory, a credible insurance mechanism should help reduce sovereign borrowing costs. If Greece was to restructure its debt without triggering CDS, it is unlikely than any other advanced economy would ever trigger CDS, with the exception of a disorderly default. This could cause a sell off of sovereign bonds in the rest of the periphery. However, net CDS protection is surprising small for the countries in the region (Chart 2), and it does not seem to be correlated with sovereign risks.

A number of developments could still affect markets negatively, at least in the short term, but we see them as having a low probability or a small impact:

  • Gross CDS exposures in Greece are still sizable (Chart 3). Concerns about counterparty risk and blind spots could trigger some market turbulence following the triggering of CDS.
  • Some bond-holders may take legal action against Greece. Such cases could take years to resolve, particularly in Greek courts, but related headlines could raise concerns.
  • The decision to activate or not CACs could be delayed, causing market uncertainty. The Greek authorities now seem adamant to activate CACs, but this is expected as they try to maximize PSI participation. All related PSI legal documents make the activation of CACs subject to a government approval, following consultations with the Troika. Such language could suggest that there is not an agreement yet on the PSI participation that is really needed to avoid activating CACs. We also note that the recent Eurogroup decision makes the total size of official funding conditional on PSI participation (see Eurogroup early morning hours). The Greek authorities plan to finalize everything by the end of the weekend, but this may not be possible.
  • The participation deadline could be extended. One week could prove to be a short period to allow some investors to get internal approval for participating in the PSI, including from the boards, and to coordinate with their risk management units. “Arm twisting” of some debt holders may also require more time, for example in the case of some Greek pension funds that are not willing to participate in the PSI. Indeed, in the first PSI that was planned for last summer and was never implemented, bondholders were given almost a month to decide, while press reports suggested an increasing participation during this time.
  • Consent for the CACs could be below the threshold. As we argued above, this is the worst case scenario, but has a low probability, in our view. In this case, the PSI scheme will have to be abandoned for a forced debt restructuring scheme. It could prove difficult to design a credible new plan given the limited time and the number or parties involved. Moreover, legal challenges to any such plan would be a substantial risk. The failure of the PSI after more than half a year preparations could fuel market concerns about the overall ability of the Eurozone to deal effectively with the crisis, even beyond Greece.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
LawsofPhysics's picture

My money is on an extension.

LawsofPhysics's picture

If the GOP was really different from the democrats, they would choose Ron Paul. There is only one party, for the banks, by the banks.

JPM Hater001's picture

All gravitational laws have been suspended for this afternoons announcement.


BW's picture

Of course it is going to extended.  That's the only way to keep Gold and Oil somewhat grounded. 

Nothing To See Here's picture

Nothing significant happens before the November elections are all set for the statu quo. Then all hell breaks loose, à la 2008, only worst.

graymnzrc's picture

Yesterday ZH reported that they only know @38% of the acutal holders of the Greek Bonds.

How can they have a 66% participation rate if they don't know who needs to vote?

Cognitive Dissonance's picture

"...that the market's complacency is extremely high."

I want some of what they're smoking. Don't bogart that joint my friend. Pass it over to me.

Hard1's picture

Great summary Tyler, nowhere in the media can you find such valuable information!

Vampyroteuthis infernalis's picture

One lie from the banksters leads to another. It gets to the point where you can no longer tell the truth since it will not be believed. Cover up the string of lies.

Rot in hell banksters. Good job Tyler for pointing this out!

Hard1's picture

Great summary Tyler, nowhere in the media can you find such valuable information!

zhtidbits's picture

Is today really the day?  thought we were in the 9th inning last year, but apparently innings can be added at will

CvlDobd's picture

The beauty of baseball is the potential for a never ending game. Apparently debt negotiations follow similar rules.

JPM Hater001's picture

No.  Exact same rules.  You play until it's over.  This is the top of 46th inning.  All tied, runners on 1st and 3rd with a nearsighted catcher and a blind pitcher in what can only be described as the hum dinger cliff hanger of all time.

Batter UP!

Cognitive Dissonance's picture

(Never ending) extra innings bitches. :)

GeneMarchbanks's picture

Why is this happening Durden?

'Activation of CACs and triggering of CDS in Greece could even have a positive market impact, at least in the short term.'

Ain't that some shit?

LawsofPhysics's picture

People of the "civilized" world are complacent and central banks have always known about the real energy crisis resulting from exponential growth.  CDS were engineered as a place where fiat will go to die and usher in the SDR or some other "new world deal".  This has always been the plan, now what are the 99.9999% going to do about it?  The central banks are once again throwing down the gauntlet and basically saying; "yeah we stole/control everything, now what are you going to do about it?"  China's population are already great servants of "the state", and banks are "banking" on everyone else getting in line.  Bloody obvious.

JPM Hater001's picture

What have you to say Left side of the Mouth? 

"Five-year Greek contracts now signal a 97 percent chance of default, CMA data show. "

And from the right side of the what have you to say?

"The most likely scenario is activation of Collective Action Clauses (CACs) for all bonds under Greek law – about 87% of the total. We expect that PSI consent for these bonds to be above the 66% threshold required to activate CACs. "

Next on HEE HAW: Gloom despair and agony on me (Truly a must watch)

Nothing To See Here's picture

Triggering CDS would mean there is an acknowledged credit event, which would give the signal that CDS on the other pigs debt could be honored. Right now, there is fear that a credit event will never be acknowledged on sovereign debts.

My 2 cents is that they might call a CE for Greece, but only as a false flag as they will never call a CE for Spain or Italy, let alone the USA.

Schmuck Raker's picture

"...triggering of CDS in Greece could even have a positive market impact, at least in the short term."


Short term relief that CDS is still a valid hedge, and Sov debt market won't immediately implode.

Then mid-term, counterparty issues on the GROSS values will BlowTFU.


That's what I've been picking up from what Tyler's been laying down.


Am I right? Do I get a cookie?

The Reich's picture

My big fat Greek Default!!! Too good to be true.

It is a bargin my friend's picture

Can we have a "guess the take up thread"?....I bagsy 82%

SmoothCoolSmoke's picture

The fix is in,  ad nauseum.

sodbuster's picture

So, they will trade their bonds that are about to be defaulted on, because they are worthless, for bonds that will be defaulted on in the future, because they too are worthless. Choose your poison I guess.

youngman's picture

Yeah all hold our breath....I expect a few more plays in this will go into overtime...and then some...

What was funny is that CNBC´s Cabruso is in Greece..she said the pensioners did not know that they were going to get a 50% cut in value of their pensions....they thought they were "protected" better yet...she said the government made them buy the Greek am choking on my Gyro......

Moneyswirth's picture

CNBC´s Cabruso is in Greece

With or without gas mask?

This is all rather amusing and pathetic at the same time.  Bankers have systemically fleeced Euro-citizens of their livelihood.  Coming to an America near you.

What a shame.

LawsofPhysics's picture

hey, with a 1000% return on the one year, how can they lose?

Moneyswirth's picture

Point taken.   Imagine your anticipation as you're waiting for that first coupon payment to be credited to your account....

SmoothCoolSmoke's picture

I hate that big titted bitch Cabruso with her f'n smirk.  She loves that the Greeks are suffering as she sees it as righteous atonement for their sin of not being pure right-wing Capitalists like herself.  I hope Riot Dog latches onto her ankle like it was a soup bone. 

SheepDog-One's picture

So all is deemed a great success, except for the looming extreme danger factor....OK then! I'm BUYIN!!

DOT's picture

Me too. Do we get some pretty paper ?

adr's picture

Just more extend and pretend. Even if the PSI goes through does anyone think they'll actually get paid on the new bonds in a few years? Greece is never going to raise the money they need and will just need endless bailouts.

Are we really to believe that some solution to trillions in debt is going to be figured out in the next ten years???

The world has gone trillions further in debt over the past ten years supposedly trying to figure out how to fix the debt. Remember the "lockbox" arguments of the 2000 election? Twelve years later and deeper into insolvency and stil no solutions.

Extend till the people in charge are dead, then let the next generation figure it out.

SheepDog-One's picture

'Low risk...high impact'....what is this, bungee jumping?

Fish Gone Bad's picture

A market can not collapse if everyone is short.  The (little guy) shorts have to be squeezed out first, and then the big boys put on shorts, sell their stock, and then run the market down.  It is the same game, over and over.

Roy T's picture

I honestly can't understand why the CAC's being triggered is viewed more positively than an outright default.  Is there hope that somehow the ISDA will declare the CAC triggering a non default event?

LawsofPhysics's picture

Tyler, could you put up a chart of the short interest or direct us to one?  thanks.

tao400's picture

If we have learned anything, it is that dates mean absolutely nothing. The more interesting question is how long can all of this go on. People here seem to think it will crash tomorrow. Who knows. It could go on for years maybe. Which is a long time to be sitting on the sidelines and making no money, except for the investment in gold, which is what I am doing. sucks.

Dr. Engali's picture

I just make the moving dates part of my game plan. I know that all the rules have been tossed out. So I ride the liquidity train and quickly peel off profits. Those profits go into precious metals. Don't sit in fear , that's what they want you to do,just stay nimble.

CrashisOptimistic's picture

There is far too much talk of gold here, which is not relevant to how many people are about to die.

Dates are indeed irrelevant for the fundamental reason that governments will do anything at all to keep the wheels turning on the train.  Anything at all means anything at all.  If there is a date, then there is a visible threat, and visible threats will be undone via whatever it takes, up to and including murder.

It's when there is no date, when the markets just decide they will buy no more Italy bonds, and this after the ECB says it will do no more LTRO (which it recently said) and will buy no sovereign bonds, and Italy can't borrow, on any date . . . that's when the problems arrive.  These are things without a deadline.  They just arrive when they arrive.  Because there is no deadline there is nothing for government assassins to concentrate on.

Jake88's picture

My head is spinning.  Can someone draw me a picture with circles and arrows.

alien-IQ's picture

There are no arrows, just circles. Like a cat chasing it's own tail or a snake devouring itself.

firstdivision's picture

Another moment of truth are the EZ countries wanting to get their gold back from the Fed.  They will try to quietly move it all to their home countries, and then it is game over.  The periphany countries will defualt as ECB will not help.  EU will collapse; those indebted to other countries will have their gold confiscated.

Snakeeyes's picture

Our Big Fat Greek Debt Swap.

We are supposed to get excited about Greek banks taking a deal on Greek sovereign debt? 

bentaxle's picture

If Greece does manage to stumble through to the other side, without a default, won't it effectively mean all bondholders everywhere have buckled to the will of the politicians? That extending and pretending will become the new economic order for a long time and that therefore PM's will be out in the proverbial wilderness for however long that is? 

Winston Churchill's picture

The thieves are falling out.

The banks will not lend to each other.

Now the CB want their (ball) gold back.

STHF soon.

Schmuck Raker's picture



Oh, slay me.

gjp's picture

Grece is saved!  Buy SBUX at 30x PE for all the $5 coffees they'll be buying with Troika money.

Dr. Engali's picture

I usually spell Greece with three EEE's :->   Just messing with you man.

adr's picture

The Greek debt doesn't matter. The goal of the game is for the Euro banks to get freshly minted cash from the ECB without triggering the CDS they sold to themselves to continue the ponzi. Greece needs to act as the laundry for the dirty money.

The ECB can't just hand money directly to the banks, that just wouldn't look right to the sheeple. They still think banks actually get their money from deposits, hahaahah.

If I tried to deposit $20k in cash at a bank I'd probably be turned away. Or better yet turned into the Feds.