Back on May 5th, before the shocking outcome of the Greek elections was known, and before anyone had even heard of the May 15th €430 million bond maturity, we explicitly warned that in the case of continued lack of government in the country (predicting the inability to form a gogvernment) that, "it is unlikely that Greece can persist under anarchy, especially with another critical event coming due: a €430 million payment on an international law bond that matures on May 15, and whose owners have held out from the PSI process (remember that? apparently not all has been swept under the rug). In fact we now know that the Norwegian sovereign wealth fund could very well be the entity that will demand payment and when it doesn't get it will promptly proceed to sue Greece." Indeed, as explained, the bond is held by non-PSI holders, and it has international-law covenants, in other words by parties non compliant to the PSI agreement and whose claims must be satisfied unless total chaos were to break out in the sovereign arena! Which means that for all the rhetoric about the successful Greek PSI with acceptance rates of nearly 97%, it is one tiny issue that can derail the whole process and send Greece into an out of control default.
Recall what only Zero Hedge warned back in January: "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" It appears that more have grasped this outcome, and now 5 days ahead of D-Day are once again dumping all exposure to the bond which some other hedge funds called a "No-Brainer" and the "Trade of the Year."
First: here is what Bloomberg followed up with a few days after our post:
Two months after forcing through the biggest-ever sovereign bond restructuring, Greece once again faces the prospect of becoming the first developed nation to default on its debt.
A decision to pay the holdout foreign-law bond investors may have to involve the so-called troika of the European Commission, European Central Bank and IMF, which are supervising the country’s bailout.
“If they decide to pay, Germany and the troika have to come up with the money,” said ITC’s Koutras. If Greece doesn’t pay, the foreign parties “will have to approve it,” he said.
Amadeu Altafaj, a spokesman at the European Commission in Brussels, said in an e-mail that a decision on whether to pay holdouts “is a decision of Greece and only of Greece.” An ECB spokesman in Frankfurt declined to comment and an IMF spokeswoman in Washington didn’t respond to an e-mail.
As Greece struggles to restructure its economy and stay in the euro region, politics may trump longer-term considerations such as continued access to capital markets. Along with a decision on the bonds, the new government will be under pressure to implement 3 billion euros of cuts immediately, followed by another 12 billion euros in 2013 to 2014, according to UBS AG analysts led by Stephane Deo in London.
Greece achieved a high participation rate in the PSI debt exchange because almost all of its debt was governed by domestic law. Parliament legislated to insert so-called collective action clauses, or CACs, into terms of the notes retroactively, allowing a qualified majority of bondholders to agree on a loss that holdouts would also be legally obliged to accept.
Bonds governed by foreign law aren’t susceptible to such treatment by the Greek Parliament, meaning that any decision to default may land a new government in a foreign court where it would have to defend its actions.
“So far, everything has been done legally in Greece,” said Athanasios Vamvakidis, the head European currency strategist at Bank of America Corp. in London. “Failure to pay would be clearly illegal. They will lose in court, and it will cost Greece and the euro zone more in the end.”
In other words, a verbatim, if rather dumbed down, transposition of everything we warned back in January.
And second, here is why anytime someone tells you a trade is a "No Brainer", and is "the trade of the year", you should run...
So yes: not only has nothing been fixed in Greece (sorr y all you PSI fans), but the country may now be forced to default (again) next Tuersday, when nobody expects it, only this time, there will be no government at all for damage control.