This page has been archived and commenting is disabled.

Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World

Tyler Durden's picture


Yesterday, Reuters' blogger Felix Salmon in a well-written if somewhat verbose essay, makes the argument that "Greece has the upper hand" in its ongoing negotiations with the ad hoc and official group of creditors. It would be a great analysis if it wasn't for one minor detail. It is wrong. And while that in itself is hardly newsworthy, the fact that, as usual, its conclusion is built upon others' primary research and analysis, including that of the Wall Street Journal, merely reinforces the fact that there is little understanding in the mainstream media of what is actually going on behind the scenes in the Greek negotiations, and thus a comprehension of how prepack (for now) bankruptcy processes operate. Furthermore, since the Greek "case study" will have dramatic implications for not only other instances of sovereign default, many of which are already lining up especially in Europe, but for the sovereign bond market in general, this may be a good time to explain why not only does Greece not have the upper hand, but why an adverse outcome from the 11th hour discussions between the IIF, the ad hoc creditors, Greece, and the Troika, would have monumental consequences for the entire bond market in general.

But before we proceed with the analysis, we should point out one minor nuance: Salmon, and thus the WSJ's Fidler, are correct that Greece has all the leverage in the world, in the same way that a suicidal person has all the leverage to take their own life as they stand on the ledge of a skyscraper. Because from a strategic standpoint, the reality is that over the past 2 years, the entire financial establishment has done everything in its power to mask the fact that Europe is currently undergoing a stealthy restructuring, without it actually being represented as a restructuring. The reason for this is that while an ex-event of default status quo allows the world's financial establishment to continue marking sovereign debt, even highly impaired one (remember: central planners are always right, markets - always wrong in pricing risk, or so the central planners say), at whatever prices it desires (recall that one of the very first things to happen in the post-Lehman collapse was the elimination of the Mark-to-Market statute, thus affording banks a plethora of gimmicks to mark 'assets' on their books at any valuation that excel spews out based simply on input assumptions, which in some cases are openly fraudulent), a case of sovereign default will very likely make mark to market unavoidable, thus exposing the proverbial nudity of the emperor. It also has implications for the ECB, for CDS triggers, and other consequences, but those are of secondary importance for the time being. Most importantly, the Nash Equilibrium at least until now, had afforded creditors, who in many cases have known very well that they have 'weak protections' on their sovereign holdings (more on this in a second), the myth that they are not subject to subordination, or seniority claims on their holdings, and thus the sovereign market was uniform, or pari passu. The outcome of the Greek negotiations, should Greece indeed use the "nuclear option" and force a coercive cramdown on any one, or all, bondholder classes, would do away with this myth in the blink of an eye, and instantaneously create a split between what will hence be perceived as senior and subordinated sovereign bonds. These are all considerations that the ECB, that European banks, and most importantly European sovereigns (and Greece) are all too aware of, and since the need to fund future deficits will only rise, any impairment of the sovereign funding apparatus is not only suicide for Greece, but for Europe, and eventually for the rest of the developed world.

Additionally Salmon ignores a simple tactical observation, one which the hedge funds are all too aware of, namely that while the bulk of Greek bonds are issued under Greek-law (a fact we first observed back in June, when we made the assessment of just who it is that really holds the reins in the default process) and while lacking collective action clauses, can be 'crammed down' retroactively, a smaller portion, which is estimated to be between €25 and €40 billion, has been issued under foreign, primarily UK-law, with strong creditor protection, and with Collective Action Clauses, which require that anywhere between 66% and 75% of all creditors agree to a given process, in this case the ongoing Greek prepack exchange offer (more later), for it to occur. It also means that bondholders in all other European countries are carefully watching if contract rights of "strong" UK-indentures are abrogated either in Greece or elsewhere, which would be a signal that there is no sovereign debt in circulation that is safe any longer from future attempts to strip positive and negative covenants, or explicitly stated bondholder rights. This is especially topical, as with Greece about to proceed with a prepack (non) bankruptcy, all eyes will turn to Portugal which is next, and after that Ireland, Spain and Italy. In this regard, what happens in Greece, under the advice of Cleary Gottlieb's Lee Buccheit, will be seen as a framework for all future bankruptcies that Europe will undergo.

And if Greece does proceed with what Salmon indicates is its "upper hand" course of action, what it will be doing, again going back to game theory, is defecting first, in the process forcing a broad sell off of weak, and potentially, strong indentures bonds of the other PIIGS nations, eventually leading to the collapse of demand for European paper, and the complete loss of confidence in the ECB, which has become a defacto source of equity for the PIIGS, an outcome which will eventually lead to the elimination of all funding for Greece itself. Which is why we said that Greece has as much leverage as one about to commit suicide... but at least it will be first - the line after it long and dignified.

Greek Bankruptcy 101

Before we get into the implications of what a scorched earth strategy by Greece would be, we would like to explain the process as it stands in Greece. Greece, has over the past nearly two years, been the functional equivalent of an insolvent corporation. The hundreds of billions in Troika bailout funding provided so generously to Greece is nothing but a prepetition Debtor in Possession (DIP) loan, with a first lien and collateral protection. The IMF may get paid back, but Greece will say goodbye to half its islands and historical monuments in the fire-sale that precedes. Furthermore, the ECB which as recently estimated by Barclays, has bought about €36 billion of Greek debt, is in effect a provider of equity financing. While this requires a tangential analysis, the ECB does not act as a Greek creditor, whose primary focus is to be repaid. No, the ECB would be more than happy to hold all the Greek debt, as it does not care one bit whether or not it gets paid interest - after all it can just print cash to fund its undercapitalized status should Greek bonds finally be recognized as worthless. If that were the case, Greece would be able to proceed with any debt transaction it desires, as any impairment at the ECB level would be promptly internalized, even if the ECB were to change its charter, which it probably very easily can, to make a Greek event of default a non-event from an accounting standpoint. Yes - the ECB's credibility will be greatly impaired, but how "credible" was it to begin with? Of course, Germany will hardly be pleased that Draghi is about to foot the bailout of an otherwise insolvent country, and monetize hundreds of billions; yet this would be spun that in doing so, the ECB would be assuring that continuation of the existing way of life... if only modestly longer. In short, this means that the ECB has been acting as a proxy debtor pari passu to Greece, even though it owns Greek debt. Said otherwise, the ECB has been conducting a quiet Greek debt-for-equity exchange, which would have had far greater success if, paradoxically, the market deterioration had persisted after the summer of 2010, when however the Fed proceeded with QE2, and stabilized credit markets (briefly). Of course: Europe can't devalue its currency alone - Bernanke will not be happy. The point is that if that ECB held all of the Greek sovereign debt, there would be absolutely no difficulties in getting the current "creditor" deal done as the ECB would have agreed to any terms. Especially since the ECB cares not one bit, if its Greek "equity" is impaired all the way to zero.

So we have a DIP lender, and we have continuing debt-for-equty (which has not converted nearly enough debt into equity). What is missing? Why an exchange offer and an actual fresh start balance sheet of course. Which is where the so-far-failing IIF negotiations come into play.

Here the moving pieces are most fluid, and the adversaries are Greek bondholders on one hand, primarily hedge funds who have bought Greek bonds in recent weeks and months and who seek as high a cash payout as is possible, and the IMF on the other, which is trying to make the "fresh start" Greek balance sheet as viable as possible. Because even at a 120% debt/GDP ratio post "reorg" it is hardly a leap of faith to assume that Greece will be insolvent again, and that quite quickly, especially with the country paralyzed by daily strikes, and where the deficit is now well into the double digits. At last check, the negotiations had stalled with private bondholders offered 30 year "post-petition" (said in gest - if Greece gets its agreement, there will be no actual bankruptcy petition, but for all intents and purposes there is) bond with a 4% coupon, which however, the FT just announced, would be cut to 3.5% on IMF demands, making the deal even less palatable for hedge funds. To sweeten the deal, the creditors would also be offered a 15% recovery on par in the form of short-term EFSF bonds, but no actual cash. We leave it up to our readers imagination what happens to the EFSF bond's price when all the Greek bondholders proceed to dump their allocations at the same time.

Needless to say, this is the stage where the leverage shifts from Greece to the creditors. Because while Greece and the IMF can demand that bondholders suffer 100% losses (even if that means a complete wipe out of Greek pension funds holding Greek bonds - a totally separate topic which we are confident the Greek media will have fun with on its own), exchange offers are never a sure thing, which is why it has never been branded as one for popular consumption, as failure would mean that the creditors have won and that a freefall bankruptcy is imminent.

This is also the stage where the broader media is confused (whether objectively so, or by representing the interests of conflicted hedge funds) as evidenced by the Reuters conclusion. The reality is that in order for an exchange offer to be binding, some majority of bondholders have to agree with the transaction. The problem is that the bulk of Greek bonds do not have what is known as a Collective Action Clause, or a framework which says what percentage of favorable votes is needed to enforce a decision, all have to agree. However, this opens the door for changing the rules. As Citi explained some time ago, "Greek law bonds have no Collective Action Clauses (CACs) which mean that voluntary restructurings require 100% of investors to accept the new terms in order to avoid triggering a default, an almost impossible hurdle." Which is why the Greek negotiation process implicitly requires the retroactive imposition of CAC, one which on one hand will facilitate the "exchange offer", yet on the other will create great distrust of any bonds issued under domestic law in other European countries.

Yet 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.

Blocking Stake

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. This is what is also known as "nuisance value" because in exchange for their votes, those blocking stake holders can demand anything, and be virtually assured of getting it, in order to allow the restructuring process to continue. This is precisely what the hedge fund hold outs, who started accumulating a block stake in the UK bonds some time in October, figured out in mid- to late-2011. And the fact that the ECB did not, back in 2010 when it was actively buying Greek bonds did not, only made it easier.

In a seminal paper by the IMF's Manmohan Singh titled "Recovery Rates from Distressed Debt -Empicial Evidence from Chapter 11 Filings, International Litigation, and Recent Sovereign Debt Restructurings", he does a far better job of explaining the holdout precedent than us:

Under the United States Bankruptcy Code, approval of a plan to reorganize requires the approval of two-thirds of each class of creditors. In response to this requirement, some vulture funds attempt to acquire more than one-third of a company's subordinated debt, with the object of blocking approval of the plan. By delaying the disbursement of funds to creditors, the holdouts exert pressure on senior unsecured holders to strike a deal rather than suffer further losses of time value of money. As a quid pro quo for their consent to the plan, the holders of a blocking position in the subordinated paper demand a larger percentage recovery than they would be entitled to under absolute priority.

And there is the entire Hedge Fund hold out strategy in a nutshell. Since as we already know the local-law bonds are in effect a junior class to the UK-bonds (and only senior to the ECB's bonds which are effectively a worthless equity tranche), the bargaining power of the process is now with the one or more hedge funds who control the UK-bond blocking stake. Because while Greece can force the local law bonds to agree to anything, and thus enact a coercive "cram down", it has no such control over UK-law bonds. At least not explicitly, but more on that in a second.

As it so happens, the bulk of the UK-law bonds have a 2016 maturity as the following Chart from Citigroup shows. In fact, of all vintages, this one is most evenly spread between Greek and UK-law.

So how does the active build up of a blocking stake look like from a pricing standpoint? It looks as follows: in this chart one can easily see the preferential accumulation of a UK-law bond over its less "protected" cousin in recent months as this strategy was being implemented by one or more hedge funds.

As can be seen the price for this preference is as high as 10 cents over the proposed "recovery" value for the entire bondholder class as a whole according to recent IIF leaks. Would one pay 43 cents for a bond unless there was something up their sleeve? Obviously not. Which brings us to a whole new topic of "sovereign litigation arbitrage" (prepare to hear this phrase much more in the future). But before we get there, there is one more open question: is it possible that the ECB does in fact hold the trump card, and can negate a blocking stake in the UK-bonds? Again we turn to Choi and Gulati:

The reason the ECB’s large debt holdings are important to the story is that the power to hold out is limited by the fact that, even in the English?law bonds, there exists a mechanism to quash the holdout. Specifically, a large enough fraction of the holders (between 66% and 75% of the bonds in principal amount) can collectively choose to cram down a restructuring on the holdouts. We do not know precisely what fraction of the various English?law bonds the ECB holds. But presumably it is a non?trivial amount, leading the bondholders who might be contemplating holding out, to be concerned that the ECB might use its votes to force a deal on them.

It may not be trivial, but it certainly is not sufficient. Because when one thinks that of the €25 billion in calculated face non-local bonds out there (of which some are non-UK law), the hold outs have to merely control a third plus one or just under €9 billion. At recent prices this is about €3 billion. A €3 billion investment to control the restructuring of a €240 billion (excluding the Troika's DIP loan) balance sheet? Not bad at all.

So now that we know more or less what the hedge fund strategy is, what happens if one does in fact assume that Greece has the upper hand, and that it is willing to proceed with terminal game theory defection and blast contract law into smithereens only to get a short-term respite?

First, as a reminder, here is how JP Morgan's Michael Cembalest described the potential next steps if indeed Europe proceeds with the scorched earth, aka, strip all UK-covenants, process.

Will Greece put “collective action clauses” (CAC) in place? Without getting too detailed, many Greek bonds were issued under language known as “universal consent”, which means that all creditors have to agree to changes to maturity, interest or principal. A CAC allows the issuer to obtain a plurality of support from bondholders for changes to the bond indenture, and then impose them on any holdout creditors. There’s nothing wrong with CACs, except for the fact that applying them retroactively changes the rules of the game, and makes a mockery of the quaint notion of contract law. As we explained in Appendix C in our 2012 Outlook, contract law protections for investors in sovereign debt are very weak. Don’t like retroactive CACs? Go sue in an Athens court; good luck to you.

A couple of points here: Cembalest is correct that those pursuing an Orphan Bond option (more on this later) will likely see an uphill climb. However, it is also true that as Singh points out, some of the best recoveries in all distressed work outs come precisely from orphan bonds. Litigation arbitrage gamesmanship aside, however, the JPM Pvt Wealth CIO has nothing to say about UK-bonds, because if the CACs of those indentures are stripped, and overriden with a new set of CACs, which is explicitly what would need to happen for a Greek pari passu fresh start bond market. then all bets are off, as it would mean that the very premise behind indenture protection is now at the mercy of lawmakers on a case by case basis. And just like MF Global being caught red handed commingling client funds was an event that crushed many investors' confidence in the stock market, so a strong-indenture cram down would have a comparable effect on the bond market.

Incidentally, here is Singh on Orphan Bonds and why they themselves can be so appetizing to distressed investors:

Distressed debt firms prefer holding illiquid debt to liquid debt since it is cheaper but carries legal rights identical to those of the relatively more expensive liquid debt. One example of illiquid claim is orphan bonds where the majority of a specific bond has either been extinguished via regular amortization prior to default or, has been given a new CUSIP' (identity) number following a debt exchange. For example, market sources indicate that Argentine orphan debt was keenly sought after the default and has already been bought by distressed debt accounts. Preliminary data from Bloomberg and market sources indicates that three main denominations of Argentine debt were sought after by distressed debt accounts. These were the 12.125 percent coupon 2019's, where about $102.5 million remained outstanding from the original $1.43 billion; the 10.25 percent coupon 2030's, where about $240.5 million remained outstanding from the original $1.25 billion; and the 12 percent coupon 2031's, where about $15.2 million remained outstanding from the original $1.175 billion. In this example, hold-outs have full payment in mind (including accrued interest) and with double digit coupons, interest arrears could be sizeable as the restructuring will most likely be protracted.


Prominent distressed debt accounts in the United States (WL Ross & Co, Oaktree, Cerberus, Angelo Gordon, or their affiliates) usually look for inexpensive claims, provided opportunities from the U.S. corporate distressed debt market do not "crowd out" investment into junk emerging market debt.

At this point it may be worthwhile to take a detour into...

Collective Action Clauses

While a staple in US corporate bond indentures for a long time, Collective Action Clauses (CACs) are a relatively new development in the sovereign bond market. Elmar Koch explains:

Collective action clauses (CACs) are a new element in the international financial architecture which is to ensure orderly and timely resolution of sovereign default. It was only in the summer of 2002 that a Working Group of the G10 was set up with the explicit aim of providing guidelines or a framework for the formulation of these clauses. The proposal by the Working Group gained wide currency with its endorsement by the G10 Finance Ministers and Governors in September 2002. At the same time, US private sector trade associations (“Gang of Seven”) also developed their own proposals for such clauses and there was IMF support throughout the whole period.


In February 2003 such clauses were for the first time included in a sovereign bond issue under New York (NY) law by a large major borrower, Mexico, and several other sovereign borrowers followed suit during 2003-04. By the beginning of 2004 it had become clear that key elements of CACs, in particular majority action clauses, had been included in this new bond documentation. This feature is expected to contribute to the more orderly resolution of sovereign debt crises by preventing unwarranted creditor holdouts.

Yet ironically, in the case of the Greek exchange offer, it is precisely these bonds that allow some form of plurality to be enforced and to override the government's attempt to enforce a unilateral decision of creditor stripping.


CACs are an integral part of the bond contract between a sovereign borrower and a private sector lender. These clauses become effective when and if a default of a sovereign borrower occurs. The vast economic literature coping with assessing the debt sustainability of a sovereign borrower is thus relevant. In the international context, a sovereign borrower may default on its bonded debt for a variety of reasons which reflect the ability and willingness to honour its debt obligations. From a legal perspective it is easy to claim pacta sunt servanda (contracts have to be honoured), but from a humanitarian/economic or political perspective a sovereign state may assess any debt payments quite differently. However, the CACs discussion usually assumes that the underlying sovereign debt at stake is deemed to be unsustainable.


From an international perspective it is desirable to aim at a resolution mechanism in debt restructuring that has the attributes of fairness (equity) to all parties and is orderly and timely. It should be noted that CACs are not concerned with the substance of the debt negotiation process itself but are primarily concerned with the process of the settlement of litigation within the legal system. Thus any agreement or settlement procedure (negotiation, mediation or arbitration that parties conclude outside the courts) may also be satisfactory and will not necessarily be covered by CACs. The contractual CACs were aimed at two emerging issues: the distribution of a large number of retail bondholders worldwide on the heels of a large credit appetite by some sovereigns, starting with the 1991-92 boom period, and the associated issue that some creditors will attempt to manipulate the process for their own benefit. More recently the emergence of in-fighting between creditors themselves in order to take a stab at assets of sovereign states first has emerged as a serious threat in upsetting orderly and timely restructuring.

The specifics of UK-law and "strong protections":

Traditionally, CACs were typically included in sovereign bonds governed by English, Japanese and Luxembourg law. Historically, such bonds issued under US, German, Italian or Swiss law did not include such clauses. The largest market for sovereign bonds is in the US, the State of New York. The adoption of CACs on the NY market was thus the key to providing an internationally acceptable level playing field (see Box 1). While Italy adopted CACs in 2003 under NY law, sovereign bonds issued under German and Swiss legislation last year were without CACs.

Yet even CACs still carry risks to sovereigns. So while the conventional wisdom is: "Good luck in Athens bankruptcy court", some eagerly desire precisely that option:

The wide interpretation of the pari passu clause in terms of pro rata sharing in settlement of the debt has the potential to unhinge CACs. No state will be able to make safe payments when these payments are transferred through another entity. Sequestration of such payments is possible.


Due to the above risks, markets have already been exploring new/other mechanisms to circumvent such risks by collateralising future flow receivables. The evaluation and effectiveness of such new instruments are beginning to be evaluated.


Sovereign bonds in the US do not include effective deterrents to bringing individual holder suits. These are included in UK-style trustee bonds but are not part of the fiscal structure. This appears to unhinge majority action clauses to some extent.


The immunity protection of sovereign states may be seen as a deterrent against individual legal proceedings. Yet, immunity protection itself may be at stake, as evidenced by the case of Italian bondholders vs Republic of Argentina. In these cases, CACs appear to be the unique suitable tool at the disposal of unpaid individual creditors.

There is much more in the literature on the topic of CAC and we point readers to Collective Action Clauses - The Way Forward for one of the best primers on what is sure to be a hotly contested issue as there are many more bonds in the European periphery and core which will be the object of precisely such analysis in the future, but for now we will simply point out that the main reason why CACs became such a hot topic in the early 2000s is because various hedge funds would sue countries for defaulting, and proceed to reap substantial windfalls after several years of litigation. The imposition of CACs was meant to halt this. And as noted above, the irony is that currently it is the CACs afforded to bondholders via UK-law, that is the focus of a potential cram down to keep the Greek debt exchange rolling along.

Yet the biggest concern once again, is that Greece does in fact go ahead and do something unprecedented, such as force all bondholders, not just the Greek-law ones, to be crammed down into a new issue. The chart below from Koch shows how many protections would immediately be rendered worthless, and why sovereign bondholders everywhere, not just those with local law indenture, but UK, are following all updates out of Athens very closely.

Before we, like Reuters and like JP Morgan, accept that even the local-law debt can be crammed down, we point readers to a seminal paper by none other than Lee Buchheit, the same one who is currently advising Greece on its bankruptcy negotiations (to call a spade a spade), called How To Restructure Greek Debt from May 2010, in which he says the following:

No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy.

  • If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments.
  • A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board.
  • The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments.
  • The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge.

And here is how Buccheit predicted precisely the weaknesses of the plan he himself is currently pushing for Greece, weaknesses which the hold out hedge funds are all too aware of:

In the case of Greece, such a challenge could come from three possible sources. The first is Article 17 of the Greek Constitution. That Article declares that no one shall be deprived of property “except for public benefit” and conditional upon payment of full compensation corresponding to the value of the expropriated property. The question, it seems to us (non-Greek lawyers that we are), is whether a mandatory alteration of the payment terms of a local law Greek bond in the context of a generalized debt restructuring could be said to impair the value of that bond; an instrument that, in the absence of a successful restructuring, would have in any event been highly impaired in value. Also of possible relevance may be Article 106 of the Greek Constitution which gives the State broad powers to “consolidate social peace and protect the general interest.”


A second source of possible legal concern might lie in the European Convention on Human Rights and its Protocols. Article 1 of Protocol No. 1 protects the right to the “peaceful enjoyment of possessions”. This right may be restricted only in the public interest and only through measures that do not impose an individual and excessive burden on the private party. That said, Article 15 of the Convention permits measures, otherwise inconsistent with the Convention, to deal with a “public emergency threatening the life of the nation”.


Finally, foreign holders of local law-governed Greek bonds subject to the Mopping-Up Law might look to Greece’s Bilateral Investment Treaties for redress. BITs protect against expropriation without compensation, as well as unfair and inequitable treatment. It appears that Greece has signed more than 40 BITs with bilateral partners.


Assuming some version of a Mopping-Up Law could survive any legal challenge, however, it could have significant tactical implications for a Greek debt restructuring. More than 90% of Greek bonds are governed by local law. If, to use our example, holders of 75% of all eligible bonds (local law and foreign law) were to support a restructuring, our version of a Mopping-Up Law should operate to ensure that more than 90% of the debt stock will be covered by the restructuring. The Mopping-Up Law would not affect holders of foreign law bonds. Participation by those holders would need to be encouraged by moral suasion and the use of contractual collective action clauses in the relevant bonds.

It certainly appears that not even the Greek law change is as much of a done deal as is widely expected. As for the foreign law bonds: good luck trying to impose moral suasion unless by moral, Buccheit of course means dollar-based. Because one thing that the world's best distressed hedge funds know, it is litigation. Especially sovereign debt litigation. And in the case of Greece, funds have already threatened to sue Greece if Greece proceeds to cram them down, supposedly on the local law bonds. Many in the media were quick to shut down this line of value extraction as a big waste of time. These same people would be wise to glance at least once at the following summary statistics on returns of distressed debt transactions involving international litigation from Manmohan Singh.

Of all forms of distressed debt transactions, guess which one provides the greatest possible returns? Yup - international (sovereign debt) litigation. Still think they won't sue? Think again.

Litigation Arbitrage

It appears that for many hedge funds, buying Greek debt (and ostensibly Portuguese, Irish, and so forth), at absolutely firesale prices, is one of two things: i) an attempt to build a blocking stake as discussed above, or ii) a means to generate an actionable adverse claim in international litigation  (following a cram down or any other disputed subversion of creditor rights), which as shown previously, is on an annualized basis arguably the most profitable type of transaction ever. These are hedge funds, who are staffed to the brim with the highest caliber of international law and bankruptcy experts (many of whom have worked side by side with the likes of Buccheit), and who are versed in every nuance of all previous international bankruptcy case studies. In other words, in addition to litigation potential in case of a forced cram down, there are avenues open to litigation in the event of a 'simple' sovereign default.To wit, from Singh:

Investors attracted to this "exotic" debt market work often buy paper with the intent of suing for full recovery. These include Elliott Associates (earlier known as Water Street Bank and Trust) from the case of Elliott vs. Peru, and Dart from the Brazil Brady negotiations. Other investors that have recently engaged in such cases are: Cardinal vs. Yemen; Water Street Bank and Trust vs. Poland; Leucadia National Corporation and Van Eck vs. Nicaragua; Red Mountain vs. Democratic Republic of Congo. Most (but not all) investors have had successful litigation, or out-of-court settlements, or are holding favorable judgments/attachments on assets of the sovereign. They have averaged recovery rates of about 3 to 20 times their investment, equivalent to returns, net of legal fees, of 300 percent to 2000 percent. Litigation is a protracted process with many law suits taking 3-10 years to "settle." Legal documents on file indicate 6 years as a conservative median estimate for recovery, which suggests that annualized returns average 50 percent to 333 percent (Singh, 2002). Some of these claims were bought at roughly 10 percent of face value implying very high gross recovery rates. Subtracting legal costs, often recouped from the sovereign, these recovery rates are probably the highest in the distressed debt world. Creditor rights in most jurisdictions favor full recovery.

The bold-underlined sentence should put any concerns as to whether hedge funds will or will not sue Greece, Europe, the ECB and everyone else in the case of a cramdown and/or default to rest. And if the name Elliott appears among the list of Greek bondholders, consider it a done deal.

And speaking of suing the ECB, here our German readers may be delighted to know that in taking a gambit with hedge funds' litigation trigger finger, Greece is in fact exposing none other than the Bundesbank to litigation risk! Singh explains.

There is asymmetry between the Anglo-Saxon and continental European law regarding the nature of sovereign immunity. Starting with Foreign Sovereign Immunities Act of 1976 in the United States, a number of common law countries, particularly in the United States and the United Kingdom, have adopted legislation on sovereign immunity including protection from pre-judgment attachment of foreign central bank assets. In continental Europe, in contrast, foreign central banks are generally treated as entities separate from the foreign state. As a consequence the central banks assets enjoy little or no protection. The Deutsche Bundesbank, during the Cardinal vs. Yemen saga, considered amending the law (via Parliament) on the non- immunity provided to a sovereign whose assets are deposited with a German bank. However, the law on central bank immunity is not uniform in the major financial centers of the world. In continental Europe, there is no unified theory on central bank immunity. Central banks that are separately incorporated do not enjoy immunity, only the sovereign does. If litigation arbitrage continues, central bankers may avoid holding assets in places where there is no immunity.

We hope it is now becoming very clear why in addition to mark to market, the ECB is quite concerned about the status of its Greek bonds holdings. First, a quick reminder on the European TARGET 2 system, courtesy of Goldman:

The ECB’s main role in the eyes of the general public is to set the interest rate level at which banks can borrow reserves at the ECB. Determining the appropriate stance of monetary policy is indeed the main task of the ECB in order to fulfil its “primary objective”, which the EU treaty defines as “to maintain price stability”.

But the EU treaty also obliges the ECB “to promote the smooth operation of payment systems”, which implies “facilitating the circulation of money in a country or currency area”. The ECB plays a crucial role in the Euro-zone’s payments system through the so-called TARGET2 system, which allows banks to settle payments between each other. Around 866 credit institutions currently participate directly in TARGET2 and some 3,585 participate indirectly through subsidiaries. The daily average turnover of the system in 2010 was 343,380 payments, representing a total average value of €2.3trn.

One characteristic of the ECB’s TARGET system is that payments from one bank to another bank in a different Euro-zone country are processed through the respective national central banks. If, for example, money is transferred from country A to country B, this payment will involve the central bank of country A as well as the central bank of country B.

An important feature of the TARGET2 system is that claims among national central banks resulting from crossborder payments are not necessarily balanced. The payment from country A to country B therefore leaves, all else equal, central bank B with a claim vis-à-vis the central bank of country A. If the payments predominantly flow in one direction—always from A to B, without any offsetting flows—the receiving central banks’ claims will continue to rise, creating ever-growing imbalances in the TARGET2 system.

Thus, courtesy of TARGET 2, it may well be that German funds are exposed to Greek-related losses should the country default, and since as Singh explains the Buba could arguably be open to litigation on prejudgment attachment, is it fair to say that the risk-return of losing not only ECB credibility but also that of the far more tangible and respected Bundesbank, is likely not worth the cost of potential litigation? What we do know is that as we pointed out even before the MF Global fiasco's European hyper hypothecation connection was uncovered, the Bundesbank may "want out" of any future, and potentially current, claims exposure to the ECB. It remains to be seen just how much of a threat the litigation risk is to European central banks which are on the hook to a Greece default (i.e., all of them).

What is also known, is that the historical track record confirms that sovereign default litigation is not only not futile, but as already noted is among the most lucrative transaction types known to the buyside. Some case studies:

The Elliott vs. Peru case illustrates that payments in the clearing system can be interfered with in continental Europe. The Southern District Court of New York had ruled in favor of Elliott. Elliott had enforcement orders not only from Brussels (as is widely cited) but also from Luxembourg, the United States, the United Kingdom, Germany, and Canada. In Brussels, the court ruled that if any member of Euroclear accepts a payment from Peru, the court would impose a BEF100 million penalty on the member. As a result, Euroclear members (i.e., holders of restructured Peruvian debt) were reluctant to accept payment from Peru. This forced Peru to settle with Elliot. In 2001, a California (U.S.) court reiterated the Elliott verdict in Red Mountain vs. Democratic Republic of Congo (DRC), Kinshasa and ordered nonpayment to other creditors unless Red Mountain was paid pro-rata—and it was paid in June 2002. [ZH: more on the historic Elliott bv Peru case from "Moody's in How To Sue A Sovereign"]


Cardinal vs. Yemen reaffirmed that central bank immunity is not uniform throughout the major financial centers of the world. Germany's Bundesbank was aware of the international legal asymmetry that allows distressed funds, with prejudgment claims on a sovereign, to "shop" and seize assets in continental Europe. In this case, the plaintiff initiated proceedings on the merits in London where prejudgment attachment of the Yemeni Central Bank's assets was not possible under the U.K. Immunity Act. The plaintiff then obtained a prejudgment attachment of Yemeni Central Bank's assets in Frankfurt (where there was no jurisdiction) on the theory that the attachment was necessary to secure the rights of enforcement of the future English judgment, which in Germany would be recognized, pursuant to the Brussels Convention. This case was settled out of court in July, 2001.


Leucadia vs. Nicaragua is an ongoing case that highlights that central bank's assets are not immune in continental Europe. The lawsuit stems from the sovereign's incomplete buyback operation (under World Bank's International Development Association facility) in early 1990s. Many commercial creditors did not participate and have actively followed Leucadia's lead in taking Nicaragua to courts in the United States and the United Kingdom. Leucadia was awarded a favorable judgment in the Southern District court of New York in 1999 and tried to attach American and Continental Airlines payments to Nicaragua for flights to Managua. The Sovereign Immunity Act in the United States benefited Nicaragua prompting Leucadia to pursue attaching Nicaraguan assets in continental Europe. Currently, the sovereign is taking preventive measures by keeping all reserves in Basle, Switzerland, earning LIBID minus roughly 25 basis points. At least two other vulture funds (van Eck and GP Hemisphere) have rulings in their favor that allow them to attach Nicaraguan assets. [van Eck is a member of the Argentine Bondholder Committee].

In short, with recovery rates sufficient to make not one but two years of a hedge fund's returns in the case of successful sovereign debt litigation, our only question is where will Greece place on the below table, from the perspective of its creditors of course.

For many more litigation case studies, see Annex I in the full Manmohan Singh recovery analysis.

Needless to say, and contrary to conventional wisdom, the incentive for funds is to find a pretense to sue at all costs, so what Greece is doing is actually making the HF cartel's life that much easier, especially when Greek bonds can be bought at just over 20 cents on the dollar. Furthermore, one class of litigation we have yet to see is that of fraudulent conveyance against a provider of DIP financing in the case of a defaulted sovereign. Something tells us we will see just this in the case of Greece, as the bondholders allege that the IMF and the ECB, provided priority debt that crammed down existing claims, only to ultimately pull the rug from under the country, and thus dilute recoveries on both senior subordinated (UK-law) and junior subordinated (Domestic law) claims. Because if the bailout cash loses its superpriority status, the recovery waterfall for all claims suddenly looks far, far more attractive.

Yet all of these analyses may be very much moot, if Greece proceeds with the Plan Z scorched earth strategy, and crams down anyone and everything ratably, threats of lawsuits be damned and the structural complexities of actually enforcing such litigation, then we would really see the full market wrath in response to...

Sovereign Debt Subordination

What we present below is not our prediction of what will happen in the market. It is our view on how the market would react if Greece does in fact proceed with cramming down either the weak and the strong indenture, or just the former.

Potentially far more troubling than the consequences of a drawn out litigation in bankruptcy court, would be the market response of an implicit "foreign law" bond subordination, or the split of the bond tranche into senior and junior components. This is because according to a Bloomberg-sourced analysis run by Zero Hedge, while the local (weak) - non-local (strong) law analysis is relevant to Greece, if in asymmetric terms (with ~90% of all bond issued under Greek law), when one factors in the rest of the PIIGS, it suddenly becomes a very non-trivial bifurcation.

Based on Bloomberg data (using the GOVERNING_LAW mnemonic) in which clearly defined local law bonds are segregated from NA or non-local ones, the sovereign debt universe of the PIIGS, which amounts to €2.1 trillion, consists of €1.3 trillion in non-local law bonds, and a whopping €800 billion in local law bonds!

While not disclosing them here publicly, Zero Hedge is happy to discuss with its readers the CUSIP list of these two distinct bond sets. Because while quite a bit, if not nearly enough, has been said in the media about the two bond indenture classes in Greek bonds, absolutely nothing has been discussed about how this problem extends into the general periphery. Here, for the first time, we present it visually, by showing a matrix of bond price vs years to maturity for all five PIIGS. As expected, and as confirmed by the Choi and Gulati analysis, bonds with stronger protection (i.e. issued under non-local law) trade broadly richer than those without protection.





and Greece:

The kicker: if and when Greece proceeds with making a "mockery of the quaint notion of bondholder contract law", as Michael Cembalest so aptly put it, the spread between these two regression lines for every country, not just the PIIGS with their €2.1 trillion in debt, but every other one as well which offers creditors the option of dumping all weak protection bonds and jumping to the "strong" ones, will surge, as the realization that a very distinct class of sovereign debt has now been subordinated and that a senior and junior class of sovereign debt has emerged.

And since any incremental capital will further prime these bonds (good luck with that negative pledge covenant on the local law bonds) thereby acting as a DIP loan, in essence the sovereign debt structure is about to be trifurcated into secured, senior subordinated and junior subordinated bonds. Very soon nobody will trade corporates anymore as all legacy fixed incomes investors start doing "capital structure arbitrage" with the balance sheets of the likes of Italy.

How this will impact the sovereign bond market in the long run is anyone's guess, but it will hardly be positive. Especially when one considers that going forward even bonds issued under UK-law, should Greece attempt to strip these, will be percevied as insufficiently secure. Which means that the bond market going forward will no longer look at new sovereign bond issuance with the view that all bonds are created equal and have a pari passu standing, but that at any given moment one may be primed arbitrarily, or see any and all covenant protection stripped.

Before we proceed we would like to also point out one very curious Catch 22, in that if indeed Greece succeeds with its own exchange offer with the world not imploding, the natural next step would be for the other PIIGS to proceed with just such an exercise in order to cut their own debt load by up to 70%. Because while Greece may have the advantage, the question now become who will be second. Paradoxically, the more success this global strategy has, the deeper it sows the seeds of Europe's destruction, as more and more bondholders will actively shy away from all weak bonds first in the PIIGS, then in Europe, then in the world. Until at the end, there is no end-market demand, and the only buyer remains the central bank.

Finally, while we have no prediction of whether or not any of the above happens, one thing we are sure of: if the runaway central planners of the world believe they can legislate their way into an 'upper hand' over the bond market, in ever more desperate attempts to avoid the day of reckoning, they will fail without any shadow of a doubt. Because demand for risk comes first and foremost from a sense of stability, of fair and efficient markets, and equitability: something which has long been missing in the stock market, and which may very soon be taken away, by force, from the bond market as well.


Literature referenced in this analysis:

Pricing Terms in Sovereign Debt Contracts: A Greek Case Study with Implications for the European Crisis Resolution Mechanism; Stephen J. Choi, Mitu Gulati and Eric A. Posner

How to Restructure Greek Debt; Lee C. Buchheit, G. Mitu Gulati

Greek Debt; The Endgame Scenarios; Lee C. Buchheit, G. Mitu Gulati

Collective action clauses – the way forward; Elmar B Koch

Recovery Rates from Distressed Debt - Empirical Evidence from Chapter 11 Filings, International Litigation and Recent Sovereign Debt Restructuring; Manmohan Singh


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Sun, 01/22/2012 - 04:15 | 2086004 philipat
philipat's picture

An executive summary in English would be helpful ;-)

Sun, 01/22/2012 - 04:18 | 2086006 MayerRothschild
MayerRothschild's picture

the ironry that it starts...

in a well-written if somewhat verbose essay

Sun, 01/22/2012 - 04:21 | 2086010 Tyler Durden
Tyler Durden's picture

Unfortunately explaining why the media has such a critical concept as game theory equilibria in sovereign bankruptcies wrong not only does not fit in 10 words or less, it is also not recommended for those in the audience who habitually snort Adderall.

We try to think of even the most attention-conflicted readers, which is why the post has plenty of pictures and no sharp objects. But sometimes even that is not enough, in which case we urge readers to just go to the following website.

Sun, 01/22/2012 - 05:01 | 2086054 LowProfile
LowProfile's picture

Lol, and wow.

Question is when Greece defaults, and even if the HF's win in court, do the Greek people go along with it?

Given what seems a robust Greek black market, tax evasion, capital/intellectual flight, Greeks returning to work on farms, etc. it seems like a return to a largely barter based economy can't be too far away...  Perhaps even with some sort of alternative medium of exchange.

Well, one can dream, anyway...

Otherwise, the only other recourse is for the ECB to pay off the HF's in nominal terms.

Which will tank the EUR, and anything correlated with it.


Sun, 01/22/2012 - 05:09 | 2086064 Oh regional Indian
Oh regional Indian's picture

If it all really comes down to Juris-diction, I think one needs to go way up-ladder. In the labyrinthine world of global finance, too many roads lead to the WB/IMF/BIS combine. I mean, look at the financials short-sale ban. Country after country has used it with disdain to "law" or loop-holed it in , in a way only the writers of those laws know.

I think it's interesting that two classes of debt even exist as they do. 

Again, this fight is not going to be settled in air-conditioned conference rooms but on the streets. 

Everyone seems to be forgetting that a few million, soon to be a few hundred million as the sovereign contagion spreads, are going to be eating the short end of the austerity stick.

And unlike America, the good folks in the EU are not shy about tossing flaming cock-tails and naming names.

We will see this drama stretched or slowly unfold through March, with the US debt ceiling drama soon to take center stage again.



Sun, 01/22/2012 - 07:49 | 2086166 French Frog
French Frog's picture

What a great in-depth article on a such a complicated yet crucial subject. Bravo.

Such comprehensive financial education & knowledge has never been so cheap and so easily reachable & this is why I suspect most of us keep coming back to ZH day after day.

But ... is it just me or does anyone else wonder if someone, somewhere either know of or has in his hand THAT very special trump card that will bypass any inconvenient laws/rules that stand in its way and allow the financial criminals in charge to stop this sytem from imploding ... yet again? 

Sun, 01/22/2012 - 08:26 | 2086200 HD
HD's picture

I would be shocked, SHOCKED if they don't have some magical BS solution that will keep the status quo humming along - at the expense of the global 99.9%.

The world is FUBAR and yet the S&P is at 1300 and gold below 1,700 - this is what it is like to live through the looking glass...

Sun, 01/22/2012 - 09:12 | 2086235 blindfaith
blindfaith's picture

If the EU wants to keep Greece ( and Spain and Portugal, and Italy) in the EU...then there is only one choice...Germany must accept inflation via 'zeuor' printing to dilute the debt.

I urge all to listen to NPR's   This American Life   today on your radio or podcast later, they will have a most enlightening program on Greece and the whole mess, less the Goldman involvement unfortunately.

Sun, 01/22/2012 - 11:01 | 2086361 AldousHuxley
AldousHuxley's picture

ECB just trying to figure out how to have Greek default without credit event leading to CDS payouts.


All other countries take positions depending on whether their banks sold or bought CDS.


It is just all a game for these banksters.

Sun, 01/22/2012 - 12:27 | 2086498 Cheesy Bastard
Cheesy Bastard's picture

I was wondering how these Greek bonds could possibly lawfully be bifurcated.  I didn't realize they were issued under different jurisdictions.  I just figured they were simply gonna outright screw the little guy, but I guess they have a layer of legal protection in which to simply outright screw the little guy.

Sun, 01/22/2012 - 13:03 | 2086533 falak pema
falak pema's picture

Cheesy : your handle brings an idea to mind to solving the bifurcation problem; the greeks henceforth ONLY issue 'Feta bonds', where whoever buys them makes payment in "hard currency" but gets yields paid out in gallons of greek olive oil; transported by GREEK SHIPS.  Problem solved. Pass me the cheese please. Feta bonds have the advantage of being bio degradable, so they never rot just physically disappear one day,  and are compatible during their short lives with banking shills who would greedily take to them like mice to vice. Any banker who has invented or used a CDO or a CDS will just love Feta bonds!

The soft and subtle derivative weapon. The ultimate false flag for the Flagada Jones of Ponzi world. Apologies to Flagada, one of my heroes.

Sun, 01/22/2012 - 13:25 | 2086576 Cheesy Bastard
Cheesy Bastard's picture

Glad I could help, falak.  Exchanging currency for commodities, lets see, it seems I have heard that idea somewhere before... :)

Sun, 01/22/2012 - 15:07 | 2086769 Michael
Michael's picture

All I want to know is, how much Greek debt will be discharged?

Sun, 01/22/2012 - 20:55 | 2087268 Michael
Michael's picture

Will someone please just tell me how much goddamn fucking Greek debt will be discharged and no longer payable?

Sun, 01/22/2012 - 20:57 | 2087269 Michael
Michael's picture

You should not be able to hit the save button twice and get the same comment.

Sun, 01/22/2012 - 22:09 | 2087336 Michael
Michael's picture

I wish the PIIGS would just go orgasm and fuck the European oligarch central bank like Iceland did. Their acting like a 40 year old virgin.

Sun, 01/22/2012 - 13:12 | 2086559 ucsbcanuck
ucsbcanuck's picture

NO! I listened to NPR's "enlightening" program on patents "When Patents Strike". Calling it a load of shit is being charitable. According to another friend who listened to another "enlightening" program, NPR does not know the difference between venture cap and private equity.

Expect populist nonsense along the lines of the BBC Hardtalk interview of Kyle Bass - where Bass schools the BBC journalist.

Fri, 01/27/2012 - 07:09 | 2101943 Archduke
Archduke's picture

NPR may get it wrong, but at least it tries to get to the issues.

And you have a much better chance to correct them.

I'll take NPR / CSpan over Fox / CNN anyday...


Sun, 02/19/2012 - 15:59 | 2175621 Sven Sikztu
Sven Sikztu's picture

LOL!  clearly goes long on 'good intentions'


enjoy your chains,

Sun, 01/22/2012 - 09:54 | 2086286 Shocker
Shocker's picture

Well don't be Shocked, The default of Greece and others are pretty much already in the cards. It will be interesting to see the affects across the board because of this though.


Sun, 01/22/2012 - 10:04 | 2086299 CapitalistRock
CapitalistRock's picture

Then you will be shocked. Ponzi schemes always die.

Sun, 01/22/2012 - 10:59 | 2086357 ratso
ratso's picture

Tyler - You are back to producing the very best stuff - the stuff that keeps me coming back because you are the only source for this kind of analysis.  Brillian, just brilliant.

Kudos to you Tyler - RATSO

Sun, 01/22/2012 - 11:31 | 2086402 francis_sawyer
francis_sawyer's picture

I would be shocked, SHOCKED if they don't have some magical BS solution that will keep the status quo humming along - at the expense of the global 99.9%.

That's the convenient thing about the 1%-ers... You can probably fit em all into one room and therefore it makes it fairly easy for them to sit there and decide how to keep everything for themselves...

Sun, 01/22/2012 - 12:02 | 2086463 monoloco
monoloco's picture

But it's their money, they stole it fair and square.

Sun, 01/22/2012 - 18:46 | 2087106 Umh
Umh's picture

We're being agitated & spun while they're trying to find the BS solution. The machine will quit spinning when they are ready.

Sun, 01/22/2012 - 10:23 | 2086217 falak pema
falak pema's picture

They do as THEY make the rules and therefore bend them without any qualms of conscience or thought for the people; thats the Oligarchy mindset by definition. 

About Demagogues at the healm and rule of the Arbitrary, as one philosopher said :

It's victories are short and ephemeral, its ruins eternal...

Ponder that, (I think it was Peguy)!

Sun, 01/22/2012 - 11:06 | 2086372 SWRichmond
SWRichmond's picture


This truly excellent article highlights yet another potential avenue for can-kicking, albeit one that, like the others employed thus far, relies on the arcaneness and inaccessibility of the subject.

The rule of law, the enforeability of contracts, the protection of private property, and of course personal liberty are all under relentless and in many cases overt assault.  There is only one possible overall explanation for that, isn't there?

Sun, 01/22/2012 - 12:21 | 2086484 LawsofPhysics
LawsofPhysics's picture

Correct, these "elite" mother fuckers are lying theifs that want you to "follow the rules" while they do everything in their power to bend the rules to suit their interests.  I will simply add that there is only one possible outcome, read the history books and arm yourself now.

Sun, 01/22/2012 - 11:10 | 2086377 Al Gorerhythm
Al Gorerhythm's picture

How many trump card holders have lost their "Ace-in-the-Hole" in an unfortunate boating mishap?

Sun, 01/22/2012 - 12:16 | 2086486 LawsofPhysics
LawsofPhysics's picture

Many, myself included.

Sun, 01/22/2012 - 15:06 | 2086764 Lets Hang Parliament
Lets Hang Parliament's picture

TPTB in Europe seem less intersted in holding the trump card than avoiding holding Black Betty - aka  the Queen of Spades...lets just call la Merkel "Sweaty Betty" from now on!

Sun, 01/22/2012 - 12:02 | 2086460 LowProfile
LowProfile's picture

Here's what I got out of it:

You guys need to think of it in terms of sacrificing the currency to save the system.

The HF's, ECB and other sovereigns are now the counter party to Greek (and other PIIGS) debt.  So, they will print to cover every last scrap of it.

The negotiating with Greece is interesting, though.  For instance, didn't they just replace a general to avoid a coup?  Only reason for that is to avoid a repudiation.  I personally think that they are pissing in the wind though, Greece won't give up it's gold to pay it's debts until it is revalued wayyyy higher.

Sun, 01/22/2012 - 13:36 | 2086597 DoChenRollingBearing
DoChenRollingBearing's picture

+ another

Greece will not give up its gold, its islands or its monuments.  Why should they?

And I also agree that in the end they will print and print.  Default by inflation.


VERY interesting article of how Greece could destroy the entire world bond market, well done Tyler.

Mon, 01/23/2012 - 21:56 | 2090073 forexskin
forexskin's picture


+WOW, this is one of the most interesting stories about the debt market i've seen.

just another example of how far from fungible paper is. get a settlement against a soverign, and if they refuse to play, they cannot access any credit or money market at all.

makes it clearer why the ultimately fungible gold is held in such low esteem by bankers. gold backing and convertability for example, would make it possible for the likes of peru to continue operating without having to rely on locked down international clearing facilities.

Fri, 01/27/2012 - 07:21 | 2101952 Archduke
Archduke's picture

well for sovereigns there aren't too many ways around it.  either you:


1) you play civilised and nice and get a voluntary orderly restructure

2) you play civilised and mean and you go through litigation avenue

3) you play barbaric and nice and you privatise state assets in fire sale

4) you play barbaric and mean and you nationalise the lucrative private sector

5) you play neolithic like iceland and tell everybody to screw off.


options 3-5 tend to carry a risk of conflict and war.

though nobody's attacked iceland yet.




Sun, 01/22/2012 - 08:44 | 2086206 zhandax
zhandax's picture

Ori, think about the global financial system as a game of Jenga, and Greece is about to pull out the wrong tile.....


Sun, 01/22/2012 - 08:53 | 2086216 Oh regional Indian
Oh regional Indian's picture

zhan, Jenga is a great analogy for Global Fiat Ponzi!

Picture perfect actually.


Sun, 01/22/2012 - 09:33 | 2086258 Manthong
Manthong's picture

Black swan in a suit  : )

Sun, 01/22/2012 - 10:19 | 2086314 new game
new game's picture

JENGA - saves a lot of reading, coloring, painting and cleanup.

but really, isn't this all about mankinds inate inability to trust and honor.

as a RE broker each and every year, more and more "verbage" was added;

to cover more lack of trust situation(s). not different from mans evolution to screw each other by law...

Sun, 01/22/2012 - 17:18 | 2086986 Blank Reg
Blank Reg's picture

Quick, hire the guy with the microphone as a central banker!

Mon, 01/23/2012 - 10:59 | 2088530 GotFood
GotFood's picture


Holy crap was that freakin funny!

Sun, 01/22/2012 - 12:41 | 2086518 The Fonz...befo...
The Fonz...before shark jump's picture

I think the game barrel of monkeys is more apt

Sun, 01/22/2012 - 21:12 | 2087289 UP Forester
UP Forester's picture

Operation.  Gut a patient as far as you can without killing them, or releasing the transmittable ebola to the rest of the patients.

Sun, 01/22/2012 - 11:13 | 2086382 Yancey Ward
Yancey Ward's picture

I think one of the key points was this- a sovereign hopes to continue to due business outside it's own borders, so it's funds will transfer beyond them in too numerous ways to count.  Legal judgments can attach to those funds, and can penalize third parties doing business with the sovereign in question.

Sun, 01/22/2012 - 12:42 | 2086510 Oh regional Indian
Oh regional Indian's picture

Yancey, very good point. But given that the world NEEDS greek olive oil AND shipping sooooooo badly, perhaps they forsee no problem on that account(!!!)?



Sun, 01/22/2012 - 05:22 | 2086079 John_Coltrane
John_Coltrane's picture

Short Abstract/Summary:  When trust is lost and the rule of law violated, the financial system freezes up, like a deer in headlights.  Just like a good bank run exposes the essential fraud in fractional reserve systems.

Very nice detailed exposition ZH.

Sun, 01/22/2012 - 10:10 | 2086305 blindfaith
blindfaith's picture



where does Goldman fit into all this?


 I mean can't you feel the presence?

Sun, 01/22/2012 - 10:41 | 2086323 Al Gorerhythm
Al Gorerhythm's picture

(He's) in the room. Has been a long time but if you dust for prints, you'll find evidence of his slime trail in Elmar Koch's paper, linked under CAC in this article. Planning for this bond event started or was at least enshrined in 2002.


Collective action clauses (CACs) are a new element in the international financial architecture which is to ensure orderly and timely resolution of sovereign default. It was only in the summer of 2002 that a Working Group of the G10 was set up with the explicit aim of providing guidelines or a framework for the formulation of these clauses.

"No one saw it coming.", my ass. They saw it all right and they used their bright and shiny Romney types in the W/house and their bought and paid for judges to see it through.

Sun, 01/22/2012 - 13:57 | 2086623 darkpool2
darkpool2's picture

I agree.....this is a dynamic organism that keeps mutating ( evolving???) to preserve its existence. Its the entire essence of the kick the can down the road approach. While it may appear to the layman as a futile game of whack-a-mole, in reality it is surprisingly robust. How else to explain the fact that against all apparent odds and in the face of macro-data that suggests an implosion should have happened long ago, that the system still rolls along. Rules will be bent and changed to suit the needs of the times, and each little change is in itself not enough to bring dwn the house of cards. Layers upon layers of complexity do i think bring a degree of inherent stability, as parties manage to find benefit within ever smaller niches---- all the while not rocking the boat too much as to collapse the system.
Having said all that, i do believe that ultimately the system reaches a singularity. We just dont know the when or what. Makes investing for the event well nigh impossible......but preparation is i think assymetrical in terms of cost/benefit.

Sun, 01/22/2012 - 20:40 | 2087259 rayduh4life
rayduh4life's picture

As for the didn't see it coming defense/crowd, correct me if I'm wrong but didn't Alan Greenspan due his thesis on mortgage defaults taking down the economy.  His paper has since been removed from the nyu library if memory serves.  Wenn jedder schuldig ist, niemander ist:  When everone is guilty, no one is.

Sun, 01/22/2012 - 05:27 | 2086086 disabledvet
disabledvet's picture

what's Adderal? Anywho this is top shelf. Checked out the bio of "Mr. Restructuring" and he's definitely the real deal. To me "the country formerly known as Greece" (a term i coined over two years ago) still has one simple problem that all these "bone rolling financial witch doctors" simply ignore: once you successfully "cram-down" that formerly incredibly valuable paper into something totally worthless...why would anyone loan them a dime? I one is arguing "Greece's borrowing needs will suddenly shrink going forward," right? Seems to me you can be a total Couch Potato ( and even understand this simple fact THAT MUST BE ADMITTED TO BEFORE PROCEEDING WITH ANY RESTRUCTURING PLAN. Now for those who really want to know...and for some odd reason you all really do want to know how this turns out...well it really is this simple:
at least..."it's that simple in a complicated but wonderful way."

Sun, 01/22/2012 - 06:31 | 2086126 falak pema
falak pema's picture

Something tells me what we are seeing is a repeat rape of Greek assets; like the Elgin Marbles sitting in London town!

The Ottomans were never this ruthless!

Sun, 01/22/2012 - 12:12 | 2086475 falak pema
falak pema's picture

Ottomans : they were to the Armenians, and Kurds, and probably to the Greeks of Constantinople become Stambul, apologies!

Sun, 01/22/2012 - 10:12 | 2086296 Al Gorerhythm
Al Gorerhythm's picture

Great clip on Evita DAV! What a shame. A three minute long, powerful message, lost in a 6 minute clip as illustrated when reviewing the collective comments of the respondents to it. Mass idolatry, mass demands for security, salvation from mortal hardships, from someone who could never deliver (Evita, as depicted in the clip), followed by the same ooohing and ahhing over Antonio Banderras (?) from the respondents who watched it, missing the salient point completely. 

Strike any chords (nationally)? Obama/RP?

Sun, 01/22/2012 - 12:21 | 2086490 disabledvet
disabledvet's picture

"somebody died. Many people cared. Know one knew why. Even today...they wonder...yet do it again." Could be worse. You could be in Cairo right now.

Sun, 01/22/2012 - 14:44 | 2086715 Harbanger
Harbanger's picture

"No one new why....yet they do it again"

There are only four things certain since Social Progress began: —
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

You know the rest of the poem.

Sun, 01/22/2012 - 14:32 | 2086688 Harbanger
Harbanger's picture

Exactly, Argentina however, doesn't have a tradition of individual liberty like the US.  They revolt for more Govt solutions not less.

Sun, 01/22/2012 - 14:25 | 2086679 Harbanger
Harbanger's picture

It's interesting that you use Evita as an example of how this turns out.  Then look to Argentina after their 2001 financial crisis to see how this turns out. 

Sun, 01/22/2012 - 19:38 | 2087175 Calmyourself
Calmyourself's picture

With absolute control, Christina is a fascist pure and simple with control of the press and her own currency sniffing dogs and do not get caught with dollars.. Well for now at least,  later they will make great asswipe.

Sun, 01/22/2012 - 23:11 | 2087500 Harbanger
Harbanger's picture

She belongs to the Justicialist Party (Justice party ie. Social Justice), The Justicialist Party was founded in 1947 by Juan and Evita Perón, and superseded the Labor Party .  Yes, Christina is a fascist pure and simple.

Sun, 01/22/2012 - 06:11 | 2086108 supafuckinmingster
supafuckinmingster's picture

Bahahahahahahahahahahahahahah.....................fucking priceless.

Sun, 01/22/2012 - 11:18 | 2086387 Al Gorerhythm
Al Gorerhythm's picture

The last shoe dropeth?

Sun, 01/22/2012 - 06:59 | 2086139 knight99
knight99's picture

It was a goddamn genius post.

Sun, 01/22/2012 - 11:11 | 2086210 Al Gorerhythm
Al Gorerhythm's picture

Tyler, with respect, may I offer some constructive criticism, from someone who has had to adjudicate and respond on literally thousands of reports.  I'm not claiming to be a expert, I just have some experience and it's just an offering.

I may not be the sharpest tool in the shed but not the bluntest either but even with my acute interest, I initially found  this a hard slog. After unravelling your argument from your early asides, the reading got easier and quite intriguing.

As a suggestion, when you present an important article such as this, it makes it very difficult to grasp the focal points of your work, when the flow is abruptly interrupted with bracketed, lengthy asides or insertions of futher supportive evidence. Because the reader has an intensity too, delivery is more effective if you place your bracketed evidence at the end of you sentence (if possible). This does not detract from the point but still gives you the opportunity to support your story or brushstroke it with your quirkiness. You lose nothing and gain readability.

Yours is a difficult field and subject to grasp for laymen. Your world is inhabited with men of intrigue; men who unabashidly prey on the unsophisticated, (those unwitting masses who place their faith in those they entrust with their nation and savings). You see through them with practiced ease but we are the awakening innocents, not of their cut and you must forgive us our need for informatin that is easily digested. (If this could ever be easily digested)

It would be impossible for me, considering my background and skill set, to have found this information and then compile it in a cogent manner. You, on the other hand, have been blessed with a gift that many would cherish and I for one would like to extend my thanks to you, for unselfishly, tirelessly, sharing you thoughts, effort, passion and time with us. With that in mind (your passion that is) your response to the first few comments shows a crack in your mettle and probably linked to frustration. (Time for my aside).

I thought today of my frustrations, in trying to convince my family and friends of this impending catastrophe and grew angry with my inability to portray the story, in a way that would open their eyes to the fraud and danger.

After lengthy conversations with my brother-in-law, a university trained history teacher, patiently showing him the difference between a constitutional republic and a democracy, the morality of sound money and its inversely proportional, immoral fiat cousin, and presenting him with articles such as yours as supportive evidence, well last night over dinner he loudly claimed, in his most knowledgable "teacher's voice"; "What we need is a goverment with a benevolent dictator, like Singapore had. Like Li Kuan Yew"!

You could have knocked me flat with a feather. I just stared in disbelief and felt like slapping him conscious. Then I thought of the weary road that Ron Paul has travelled, and others like him; like you, and thought of his indefatigable fight for his ideals. When you think of the outcome of the first three GOP primaries, we still have a lot of people to convince. As a suggestion, if frustrated, don't go all Denniger on us,  try not to show folk the exit door, try to find a side door to offer. I'll keep trying too. Keep them around, we'll need them.

Anyway, before I wax too lyrical, thank you for all that you do. Fight the good fight (as they say in Ireland).




Sun, 01/22/2012 - 11:54 | 2086438 LowProfile
LowProfile's picture

After lengthy conversations with my brother-in-law, a university trained history teacher, patiently showing him the difference between a constitutional republic and a democracy, the morality of sound money and its inversely proportional, immoral fiat cousin, and presenting him with articles such as yours as supportive evidence, well last night over dinner he loudly claimed, in his most knowledgable "teacher's voice"; "What we need is a goverment with a benevolent dictator, like Singapore had. Like Li Kuan Yew"!

He is one of those who's paycheck depends on his not understanding.  Don't worry, he'll take the high, hard one right in the ass when the system is reset.  Buy some gold, and offer to trade his house and car for it when he is desperate for money (and then just only take care of your sister until the event he pulls his head out of his ass).

Alternately, you could suggest he move to Venezuela.

Sun, 01/22/2012 - 12:28 | 2086502 Al Gorerhythm
Al Gorerhythm's picture

Thanks for the advice but I'm still looking for the side door.

Sun, 01/22/2012 - 20:01 | 2087206 disabledvet
disabledvet's picture

I use the term "blurf" to describe it all...then see if they're interested. The beauty of course is I can make..."blurf"...mean whatever I want it to. And so can you!

Sun, 01/22/2012 - 12:23 | 2086488 RiverRoad
RiverRoad's picture

Re;  Al Gorerhythm

                                                                                                                                                           Agreed.  The post was in it's overall entirety excellent and Tyler's painstaking efforts to support his thesis must be appreciated.  I did find myself wishing however that the author's message could be made more evident to the average person on the street; for in the end we are the poor souls who will bear the brunt of all this.  If the world is to change at all, we must get information like this out to as many people as possible.  If highly complicated articles such as these could be prefaced with a paragraph or two readily understandable by the layman that would be extremely valuable.

Sun, 01/22/2012 - 12:44 | 2086521 Al Gorerhythm
Al Gorerhythm's picture

Having read it through, it underpins my opinion about where this is heading. The word "Bond" carries explicit understandings between gentlemen. Unfortunately, there a few to be found in that circle of vulture financiers, bankers and politicians. The people in high positions like LeGarde, Sommers, Rubin, Dhargi, Clintons, Bushes, Hopebama, Greenspan, Timmah, name an incumbent, were the 5th column who set this up. Incredibly, they are now entrusted with the task of fixing it.

The masses are oblivious, the cloak over their eyes their security blanket.

Sun, 01/22/2012 - 18:29 | 2087088 DeadFred
DeadFred's picture

Something tells me that neither the common man or even the majority of ZHers are the intended target. This was crafted and timed to be a market moving article. Why was ZH established years ago if not for posts like this?

Sun, 01/22/2012 - 22:37 | 2087449 Al Gorerhythm
Al Gorerhythm's picture

Sometimes, it is what it is.

Sun, 01/22/2012 - 21:04 | 2087277 Steadfast
Steadfast's picture

Allow me to take a shot at simplifying it a bit.

Greek Default = Bond-holder Losses = Increased cost of lending = possible downgrade by rating agencies = triggering other soveriegns to default = chaos in currency exchange rates and in capital markets = increased market volatility = less certainty due to increased investment risk = less interest in investing money = higher interest rates/returns demanded = higher future cost of borrowing = either less future borrowing (at higher interest rates) and/or same borrowing with increased taxes on the citizens.

Either way, the impact of Greek Default will trickle down to effectively increase our taxes and/or to reduce our ability to borrow at the same rate we have been borrowing...without triggering either significant inflation or currency devaluation...or both.

Greek Default = time to break out the Ouzo.


Sun, 01/22/2012 - 21:13 | 2087288 trying to make ...
trying to make sense of it all's picture

First post. I'm almost afraid to. I am a small business owner in the "property preservation" business in Florida. I discovered ZH from twitter one day and it's my favorite site to visit. I must admit, I don't understand half of what I'm reading, but I'm damned sure trying. Thank you to Tyler and the amazing commenters for the education. I'll be quiet now.

Sun, 01/22/2012 - 13:47 | 2086611 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

I was only able to read most of the article, as much of the technical archana are beyond my knowledge base.  But, the subject (destruction of the world bond market by one little country) is serious.  And now we learn that it is extremely complicated.

The lawyers will be feasting over many dead financial carcasses for years, forever.

Re trying to explain the world's plight and what we should be doing about it, I have given up.  Nobody wants to hear it.  After the SHTF, it's pretty much every man (family) for himself (themselves).  I'll help whom I can, but worthiness will count a lot in any such decision making...

Sun, 01/22/2012 - 22:59 | 2087480 gravedestruction
gravedestruction's picture

Al Gorerhythm

"Yours is a difficult field and subject to grasp for laymen."

Hence we who are not as well-read rely upon reading through these comments looking for commentary such as yours in efforts to glean an improved understanding congruent to the recognition of what is relevant and what is not.

Well stated AG.


Mon, 01/23/2012 - 00:15 | 2087594 Al Gorerhythm
Al Gorerhythm's picture

Cheers! It has been a wonderful awakening; albeit tiring and a rollercoaster with regard to emotions long attached to my normalcy bias. I've had my views on politics upended, my family has nearly ostracised me, I'm barred from mentioning "Libertarian" ideals, never the "S" word or the "G" word. Mind you they are allowed to express their opinion but mine are relegated to the "Kooky korner" at the table. Ah well. The warnings I have expressed to them over the years about sovereign debt, fiat currencies and the underlying deceit of the FEDs "Credit Note", are unfolding in front of them. They are slowly awakening. Persistance of a pig dog, patience of an indian.

Sun, 01/22/2012 - 08:47 | 2086211 fonzannoon
fonzannoon's picture

I know everyone on here keeps joking that everything is "priced in". This outcome... "if indeed Greece succeeds with its own exchange offer with the world not imploding, the natural next step would be for the other PIIGS to proceed with just such an exercise in order to cut their own debt load by up to 70%. Because while Greece may have the advantage, the question now become who will be second"...has been most people's view on how it plays out eventually.. That is priced in? I thought this outcome is what was taking down all the European Banks just a few short months ago....what changed?

Sun, 01/22/2012 - 14:20 | 2086671 Stack Trace
Stack Trace's picture

I ask myself the same question then realize not enough of the wealth has been extracted from the masses, TPTB understand that the illusion is their only leverage and it must be pushed with greater force until the mirror cracks. When this happens all the sheep will realize they have been lead over a cliff and of course they won't have "golden" parachutes but the folks that saw through this baffling barrage of bull-shit will.

Sun, 01/22/2012 - 14:50 | 2086727 fonzannoon
fonzannoon's picture

I have to tip my hat to them. They have the illusion thing going really well right now.

Sun, 01/22/2012 - 09:20 | 2086244 roy10
roy10's picture

An interesting and thoughtful analysis, but the question is how much does this actually change the dynamics in the markets at this point? Greece is locked out of the bond market and will stay lockout out for probably the next decade. So, the economic effect s of shafting bondholders won’t mean much to them at this point.

As for the other PIIGS – Spain/Italy are currently being firewalled by the ECB. Yields have been declining steadily despite worsening fundamentals and the Greek default. They will continue raising money primarily on the short-end of the curve and with more LTROs coming, I doubt is a Greek default would materially affect them either (in terms of liquidity).

Portugal seems to be the next likely victim of a PSI, but their current debt level (100% of GDP) suggests that the PSI is probably at least 2 years away. They also have been locked out of the bond market, but their rescue package should get them through 2013.

Overall, with the enormous amount of liquidity poured in by the ECB, the concerns have shifted from long-term solvency to short-term carry-trades, for which the demand is abundant and I doubt any event in Greece could change that.  

Sun, 01/22/2012 - 20:03 | 2087105 DeadFred
DeadFred's picture

A coup seems like a reasonable way out at this point. First the military doesn't accept today's leadership changes and seizes control.

Then the EU fake indignation and kick the Greeks out not because they're broke but because of the coup.

Greece defaults in their own currency and those nasty euro longs get taken to the cleaners since a euro without Greece is a much healthier creature.

Lots of hand wringing and indignant looks as the can gets kicked down the road past the elections when His Glory gets re-elected.

If it happens soon Bernanke can sneak QE in to get us past the 'turmoiled times' and the bank bondholders get reimbursed.

Sun, 02/19/2012 - 13:52 | 2175168 Piranhanoia
Piranhanoia's picture

Mr. Astaire;  You have hit upon the one thing missing from many of the other scenarios planned or dreamed by debtors and creditors.  They simply can't imagine their money going away when a sovereign nation decides that it has had enough of rule by outsiders.  Is someone going to invade Greece to force their people into labor camps to pay back the debt after default?  Not likely.  Is someone going to tie up their assets?  What assets?

Wouldn't it be fascinating if they simply do what Iceland did and move along with their future, however bleak it may appear for the recovery process?  For the collective pointing of their middle finger to the rest of the continent that refers to them as addled children not capable of voting even if Goldman allowed it within the structure of their benevolent monarchy. (as seen by the rentier)

Greece need only decide when to say goodbye to insanity in the form of their parliamentary rulers that vote against their people regularly, and work with foreigners to undermine the nation.   The combination of external threats would seem to drive them to two logical outcomes.  Choose the concentration camp the nazi's created for them 70 years ago and embrace it,  or say goodbye to the European SS and begin again.  For after all, they are more than aware that every nation demanding they tighten their belts knows Greece has their future in their hands.  Every time the Greeks tighten their belt, it will be the tightening of a noose to the parties that truly forced them into this situation.

Greece can return to an agrarian society far easier than their creditors.  Their creditors can not feed themselves after all, and rely on the slavery of smaller nations to support them.  



Sun, 01/22/2012 - 09:59 | 2086294 ZippyBananaPants
ZippyBananaPants's picture

Today I am going to draw Andy Pandy! 

Thanks Tyler

Sun, 01/22/2012 - 10:05 | 2086300 Gordon Freeman
Gordon Freeman's picture

Fascinating article--thank you!

Sun, 01/22/2012 - 10:07 | 2086303 m111ark
m111ark's picture


I first started reading your stuff about a year ago, couldn't grasp more than half of it.  Today, a little better.  Next year I expect to be better still.  Please don't "dumb it down." 

And, could you address the issue of debt money vs. interest-free money issued by sovereign nations.  I've seen it discussed on sites specific to the topic but not seriously serious sites such as this.  Seems to me, my limited experience, nations should not borrow their own currency but spend their currency on infrastructure projects which produces interest free genuine nation-state currency.  Also, banks should not be private entities with the power to create money - all loans should originate with state owned banks and the profit thereof remitted to the state as interest free money.

I think your thoughts on this topic, and the attention you give it, would produce a level of discussion that may benifit future generations with a society free of banksters and a wall street/washington criminal clique. 


Sun, 01/22/2012 - 13:16 | 2086560 cowdiddly
cowdiddly's picture

Two types of bonds one under local law and the other under non local law

HFs bought non local up for a future litigation that pays out handsomely and could bleed Greece for years in courts and Judgement payouts

Greece could change the law and tell hfs to pound sand

At that point the entire world bond market is MF globaled and no countries bond is safe.

 the bond market  then joins the stock and commodities  market as a  gigantic fraud and no investment is worth the paper it is written on. 

Sun, 01/22/2012 - 13:17 | 2086567 LowProfile
LowProfile's picture

Nice summary +1

Money creation soon to follow.

Mon, 01/23/2012 - 00:03 | 2087575 Maestro Maestro
Maestro Maestro's picture


If you did that, if you nationalized banking and turned it into a public service institution, and NOT a means of private profit generation at the expense of the public, you would solve the entire problem.  You would get your freedom, liberty and prosperity attainable to the highest degree possible whilst still living on the surface of this planet.

But we won't let you do that.

Why do you think we are passing these new laws that give us the de jure [we ALWAYS had the de facto power] right to jail you and torture you if you step out of line?

It's too late mate.  The game is over.  Now the real game starts.

And you will soon discover that you are not the players in this game.

You are either part of OUR game or you're out of the game.

The short answer to your question is NO.

Soon websites like zerohedge will be history.

We're letting it roll for the time being to keep an eye on things, as a barometer indicative of how much life is left still in the human spirit.

We are happy to report that we have succeeded beyond our wildest dreams.  George Orwell's Big Brother was an amateur next to us.

We don't need 'thought police' anymore.

You're doing your own self-policing for our benefit.  We turned you into morons who specialize in auto-lobotomy.

We have created slaves who think they are gods.

Out of Many, One.  We are the One.  You are not.

We won.

We always do.

Sun, 01/22/2012 - 11:26 | 2086394 dearth vader
dearth vader's picture

I agree, great article, Tyler! And by the way, I always enjoy mightily such innocent remarks of yours like:

"It would be a great analysis if it wasn't for one minor detail. It is wrong."

Sun, 01/22/2012 - 11:28 | 2086397 Melin
Melin's picture

I had to read one of the sentences 17 times.  It was a tough slog through a treasure trove of info.  I struggled.  I learned. 

I love this site. 


Sun, 01/22/2012 - 12:35 | 2086511 buckethead
buckethead's picture

No one promised an easy route to financial literacy.


I shall read on...

Sun, 01/22/2012 - 13:41 | 2086607 dark pools of soros
dark pools of soros's picture

best to just print out and review over the next few months while watching the bond circus unfold 

Sun, 01/22/2012 - 13:28 | 2086584 JW n FL
JW n FL's picture



Tyler Durden

We try to think of even the most attention-conflicted readers, which is why the post has plenty of pictures and no sharp objects.

1. This is why God Loves You! it is one thing to have time for or Love Your own Family.. it is another thing entirely when YOU! make time to Love others.

How You treat the Weak is Your True Nature. Jane's Addiction - True Nature

of course being strong enough to share or strong enough to be able to help others with their load after you have already carried yours and your families speaks to the kind of person you are as well.

Your Kindness for your fellow man does NOT! go un-noticed.. thusly get a bullet proof vest because the Powers that Be, HATE! Good People like You Tyler.

2. You are a good sport.. no matter how many times we hit you with bad jokes.. no matter how many times we go over the line.. you still look after us and give a shit about us.. I really am a harsh judge of people.. and I am honestly thinking of putting you up for Sainthood. and I am NOT! FUCKING KIDDING!

So, Tyler.. God Bless You and Yours!

and! you can kiss my ass for good measure! I dont want you spoiled Buck! @ 2:10


Sun, 01/22/2012 - 23:46 | 2087550 BlackholeDivestment
BlackholeDivestment's picture

...fear not, bullet proof vests just make you sweat. lol

Sun, 01/22/2012 - 13:39 | 2086604 dark pools of soros
dark pools of soros's picture

Coloring pics of Hermione bitchez!!

Sun, 01/22/2012 - 13:53 | 2086619 donsluck
donsluck's picture

I see arbritage opportunities in Italy, Spain and Irish bonds, where the spread between local and UK law bonds is likely to reverse. Thanks for the hint!

Sun, 01/22/2012 - 15:03 | 2086759 Joemusashi
Joemusashi's picture

Tyler, the post is really well written and clear.

Thanks again for the hard work you all are doing behind the curtains to explain to us, poor common people, how does the real financial markets work.

Kind regards,


Sun, 01/22/2012 - 15:17 | 2086785 Goldilocks
Goldilocks's picture



Simon in the Land of Chalk Drawings Intro (0:37)

Sun, 01/22/2012 - 16:30 | 2086914 russwinter
russwinter's picture

LoL. The short version, post Greece stage II version seems to be emcompassed by the data on "arbitrage" and endless gaming opportunities on the multitudes of non-local Spanish and Italian debt. Am I to suppose these non-local plums for the picking also means subject to UK law? This trillion dollar plus senior/ junior market is like playing with turds in sandboxes for the hedge fund boyz. They can short one againt the other, look for small print, and on and on. The average Joe has no chance here. 

Sun, 01/22/2012 - 17:08 | 2086972 DrFreckles
DrFreckles's picture

Great Article! Happy Sunday!

Sun, 01/22/2012 - 17:17 | 2086984 The Grip
The Grip's picture

To the mat! 101 Dalmatians takes the green to triple digits.

Sun, 01/22/2012 - 18:05 | 2087054 orangedrinkandchips
orangedrinkandchips's picture

bottom line....if you hold this up and get a fucking laywer..


For those who dont fuck with it, IT'S A HIT TO CONFIDENCE NO MATTER WHAT, WHERE, HOW, WHY, WHEN AND WHO........PERIOD.




SHIT OUT OF LUCK does it in 4!!!



Sun, 01/22/2012 - 20:13 | 2087225 trebuchet
trebuchet's picture

Zebedee goes boing!!!



Sun, 01/22/2012 - 21:44 | 2087329 Ropingdown
Ropingdown's picture

That was an excellent presentation.  It refreshed much, added detailed new support, and changed my view of the key issues.

Sun, 01/22/2012 - 23:16 | 2087508 kekekekekekeke
kekekekekekeke's picture

I don't understand most of the terms in this blog, I'm totally willing to learn, can you please direct me to a website/book/some other resource?

Mon, 01/23/2012 - 13:16 | 2088425 4horse
4horse's picture

the-full-monkey-barrel-a-fun'n'game theory

The Stye Strategy: never wrestle with a pig . . .
                       as in

livestock                      laughingstock
 goyim                         toyim material

the set-up                    
shoot-em-up              put down your weapon and . . .
Sitting Ducks             turnaround goesaround merrygoround&round,where she stops___ when we say so
                               palin.palestine.bachman.deutschman.santorum.insanitarium.romney-rigginginging ging

a, we iz                         b, we iz
   jus                                a2z
witcha                         gotchaaginheehaw haha's

herdmanagement        ever hearda the ultimate jj . . .
crowd control
   "    _______                 masses of asses
   "    a__2__z 
   "    _______                       wmd
   "    _______           LineUp.Now!motherfuckerspunchline?electionlines?          
   "   _______            yeh, jus hold yer nose'n'vote
   "    _______           . . . u is the p u nchline
 "   _______              we iz jus
massmurder              killin'em out there


jj: Das Kapital           j/k: Das Kapitol
     Punishment                Kaptcha

thas jus'evil                    That's Entertainment!

. . . split this!amongst yaselves bitchez


                                                                                                          los desparaceidos . . . so: re-post

Sun, 02/19/2012 - 11:50 | 2174793 mholzman
mholzman's picture

I love you. I do not know how to thank you enough for the illumination.

Sun, 01/22/2012 - 14:09 | 2086652 Eireann go Brach
Eireann go Brach's picture

MayerRothchild is one of those typical narcissistic self absorbed fucking Americans, who if handed a free iPhone would turn around and say why did you not get me an iPad instead!

Sun, 01/22/2012 - 15:08 | 2086767 4horse
4horse's picture

one of those typical _ _ _ _ self _ _ _ _ _ fucking Americans?

eireann go bravado____

meyer amschel bauer, one of the most critical characters in recent historiographyin absentia along with his 5sonsubermenschenhas seen to suchunmentionableshadows of History as has almost totally erased mention ofeven his own namewhat this one near-aristotlean Demiurgos has long since lastingly cast

                                        ____over your country first and most specifically, eireann go braggadocio, despite yet nevertheless in light of such mighty mouths as yourself

Sun, 01/22/2012 - 20:35 | 2087249 LowProfile
LowProfile's picture

<-- 4Horse is a major douche

<-- 4Horse speaks the truth

Mon, 01/23/2012 - 10:59 | 2088474 4horse
4horse's picture

4horse is  . . . MAJOR mons veneris

all up in there--------------------> yer girl's. now coming clean

Sun, 01/22/2012 - 04:36 | 2086032 B-rock
B-rock's picture

Wow, this article is good.

Sun, 01/22/2012 - 05:16 | 2086071 lolaus
lolaus's picture


Sun, 01/22/2012 - 06:53 | 2086136 bank guy in Brussels
bank guy in Brussels's picture

My contribution to try to summarise for some readers.

An important powerful article, but certainly difficult to digest ... it is not easy to write on this kind of topic clearly, as the writer who is expert on these things typically forgets to explain certain small phrases that are familiar to himself, but which don't have a clear meaning for a general non-expert reader.

Some highlights as I have them:

- The Greek bond market 'restructuring - avoid default' negotiations are a much bigger clusterf*ck than most people, especially media financial writers, realise

- Due to the legal structuring of the bonds, most of them under Greek law, but a small amount under UK law - which have different rules as to whether all bondholders can be forced to accept a 'deal' by the majority - it turns out that a few hedge funds with 3 billion of bonds can effectively control or sabotage a giant 240 billion bond restructuring, and extort special terms for themselves

- As strange as it may sound, there has been a lot of success by ruthless vulture-fund creditors suing small broke countries in Western courts, with such litigation producing 50 % - 300 % returns. Given the amount of international financial interdependence, ruthless international lawyers have been able to lock up and grab assets flowing into and out of third countries, and make life miserable for the broke little country until they are paid

- A consequence of all the twisting around of bond markets and central bank intervention that has happened already, is that bond-owners who before thought they had 'equal' rights, now turn out to be in a lower tier of two or three classes of bondholders ... and they feel increasingly nervous whatever 'rights' they think they have, might be changed by some new rule or law

- The Greek default - restructuring clusterf*ck is unlikely to be 'contained', and may well blow up the international bond market and the global economy, not just because Greece is defaulting, but because the 'rules' have been changing all along

- The 'deals' being made are likely to have consequences, given that these 'deals' may well involve even more shifting of laws and rules ... leading perhaps quickly to broader EU and global bond market collapse, as no one can trust any rules or laws anymore

What is not in the article, but I think implied from it, is that we have 'global reset' maybe coming ... something like what Marc Faber says, where the derivatives go to zero, and everything gets restructured.

And that, I think, will also involve some change in international legal arrangements, which is what the writer above might be missing. The fact that big-country courts, in the past, were willing to seize assets flowing into little helpless countries like Nicaragua or Peru, does not mean that, in a future big-collapse world, vulture funds will be able go to some 'court' to grab funds of Germany.

When things hit the fan in the big global clusterf*ck, I think legal restructuring will be a part of it, and hedge and vulture funds will be told to take their bonds they bought for 20 cents on the euro, and stick it, and that their CDS they bought are zero, too. And they won't be able to find a 'court' where they can do anything about it.

Sun, 01/22/2012 - 07:51 | 2086167 bank guy in Brussels
bank guy in Brussels's picture

The other implication I get from the article, is that because any haircut deal on Greece is now a bomb waiting to explode, almost regardless of how it is structured, the easiest thing to do in the near term - the path of least resistance - is for the ECB to print up however many tens of billions are necessary this year, to keep the whole bond Ponzi going, in Greece at least.

Being the easiest thing to do, means that is likely what will happen. They will pour 100 billion or whatever into the Greek black hole, and wait for something else to be the trigger for collapse.

Sun, 01/22/2012 - 09:03 | 2086221 zhandax
zhandax's picture

OK, I will retract my previous statement in favor of cynical pragmatism; this boils down to hedge funds with Soros aspirations against central banks and their constituent bankers with their collective balls between a knee and the wall.  Both have abundant legal representation, but the CBs have unlimited funding.  This will end up in the mother of all court cases which, like GM and Chrysler, will get stuffed up the bondholders ass by government decree to save the CB's asses.  Alternatively, if it takes too long, some black swan brings the whole pile of cards down. 

Sun, 01/22/2012 - 17:05 | 2086637 LowProfile
LowProfile's picture

My bet is the CBs pay the HFs in nominal terms.

They will sacrifice the currency(ies) to save the system(s).

Sun, 01/22/2012 - 09:44 | 2086247 falak pema
falak pema's picture

"Real politic" in all its beautiful, powerful splendour, well explained by BGB, as add on comment to an outstanding piece of financial information and analysis.

I agree with this BGB take. Merkozy, FED and GS will not let the maverick vulture funds bring down the central bank construct that holds the banking cabal worldwide together. 

But it is a very complex case of legalese, which will have deep repercussions on the financial world; one of which will be, I HOPE, the end of the derivatives scam, brought down to zero (Marc Faber prediction). How this all plays out, in Euro zone and in USA by repercussion, with so many balls up in the air, and the schedules of debt deleverage so tight and running behind the interest pile build up without real econ growth as fuel, is difficult to predict or to preempt; like these HFs are trying to do. 

The case for Casino Royale Ponzi regulation will go on until we are all bankrupt, as the Oligarchs will resist; its their do or die wish. If the deflation occurs, we may get a window to clear the table. If the hyperinflaton thingie goes on we all lose. Or/and end up for the most zealous in totalitarian construct prisons world wide.

Sun, 01/22/2012 - 14:10 | 2086656 dark pools of soros
dark pools of soros's picture

when they started hiring physicists, mathematicians and scientists to explain their pixie dust derivatives you know sooner or later the plug will be pulled and everyone go back to basic calculators

Fri, 01/27/2012 - 07:49 | 2101972 Archduke
Archduke's picture

are bridges any less safe now that we have better math for building them?

how about flights backed by radar positions using imaginary numbers?


the smart risk-arbitrage math and the science had nothing to do with it.

it's at the other end, the business end, where fraud was perpetuated.

it was done by thieving sales guys, two-faced brokers, bent regulators.

the math was undermined by naked shorts, hft front-running, toxic debt.

the math is neutral. the framework and context it works in corrupted.

Sun, 01/22/2012 - 09:40 | 2086267 GCT
GCT's picture

Bank guy I see the implications moving the same way.  First thank you Zero Hedge I had to read the article twice to make sense out of it.  Very informative.  I do not see the courts siding with the hedge funds on this one either, your not dealing as you stated, with small countries this time.  The portion I do not really understand is why would the ECB not care with all the money poured into Greece and the other countries. 

Is this because the European taxpayers are on the hook for the money? 

I see this as a chain reaction with the other countries waiting in the wing to see the outcome and then they too may just well proceed.  Once these countries default and they screw investors, why would you ever invest in their bonds again?  A country could screw investor's anytime they choose if courts in the world tell investors to take a hike.  This will basically kill the bond market for a long long time as they are no longer safe investments.  ZH has stated this for a long time, yet most people feel they are safe bets.

I hope I am looking at this correctly and if I am not can someone please educate me by using the kiss method!


Sun, 01/22/2012 - 14:17 | 2086667 dark pools of soros
dark pools of soros's picture

when debt is money you can't print without debt..thus endless printing needs sources of endless debt.. and when you realize debt = modern slavery chains; then why not print as fast as you can to enslave the most as quickly as you can?    Greek black holenomics is one of thier catalysts; endless wars are another

Sun, 01/22/2012 - 09:50 | 2086281 ISEEIT
ISEEIT's picture


Sun, 01/22/2012 - 12:05 | 2086465 dearth vader
dearth vader's picture

BGB - I appreciate your, in fact, "management summary" and other implications. If these are the main take-home points, I seem to have understood the 'portée' of Tyler's extensive exposition.

Having parked the major part of my assets in precious metals I serenely await the further twists of the CB's death spiral.

Sun, 01/22/2012 - 14:05 | 2086640 DoChenRollingBearing
DoChenRollingBearing's picture

That's it dearth.  If the world bond system (and everything else financial) is about to be reset, parking a big chunk of what you have in gold is one way we each can help ourselves through this.

Holders of physical gold "have already been paid" (FOFOA).  Physical gold > physical fiat$ > electrons at the bank > bonds.  Welcome to the Risky New World Order.

Sun, 01/22/2012 - 10:13 | 2086310 PORTA PORTA
PORTA PORTA's picture

No country in Greece’s position would lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis. The following factors, among others, counsel extreme caution before embarking on such a remedy.

  • If done once, future investors will fear that it could be done again. The debtor country may therefore be compelled in future borrowings (in which international investor participation is sought) to specify a foreign law as the governing law of its debt instruments.
  • A dramatic change in local law by one country might allow a worm of doubt to slip into the heads of capital market investors in other similarly-situated countries, driving up borrowing costs around the board.
  • The official sector supporters of the debtor country will presumably balk at any action of this kind that could unleash the forces of contagion and instability upon other countries whose debt stocks also contain predominantly local law-governed instruments.
  • The more dramatic or confiscatory the effect of the change of law, the higher the likelihood that it would be subject to a successful legal challenge


Sun, 01/22/2012 - 13:00 | 2086540 sschu
sschu's picture

counsel extreme caution before embarking on such a remedy.

With respect, after watching Madoff, MF Global, GM Bond deal and many others do you really think this matters?  These are money guys, all they care about is their money ... and that means today.  If they do not get their money, then they are prepared to take the entire system down.  They can have no other attitude when playing these high stakes games.

These hedgies have maneuvered themselves to have the leverage they need.  Pay me now or later via CDS they say.  It is a matter of who pays really.  




Mon, 01/23/2012 - 17:22 | 2090307 PORTA PORTA
PORTA PORTA's picture

have a good look...

history repeats itself.. and we ve learned shit. all of us.

i appreciate your coments


PS.. germny was happy to sign Loan Faciltiy 110bi with 5.75% !! and today they turned the gun on PSI with 3% ! lol



Sun, 01/22/2012 - 14:07 | 2086645 DoChenRollingBearing
DoChenRollingBearing's picture


Actually if you look at history (I refer to Reinhart and Rogoff's This Time is Different), you will see that very sson after a country defaults, greedy speculators jump right back in.  Argentina is the latest example.

Sun, 01/22/2012 - 16:35 | 2086922 sschu
sschu's picture

The only principle to money guys is do they have more now than yesterday.  That is why TBTF and TARP and the Fed are so dangerous to the general populace like me.





Mon, 01/23/2012 - 17:26 | 2090319 PORTA PORTA
PORTA PORTA's picture

250 trillion in derivatives... unregulated.

more than 100 trillion US REAL DEBT, unaccounted

25trillion E toxic derivatives in EU... " under the carpet"..

NOONE will default in Europe ... in Euro.- PERIOD.-



Sun, 01/22/2012 - 09:39 | 2086265 surf0766
surf0766's picture

ONly CB's are buying bonds

Sun, 01/22/2012 - 09:46 | 2086276 Rock the Casbah
Rock the Casbah's picture

Dude, this IS the executive summary.

Outstanding work ZH! Maybe readers should have to pass a quiz before getting rights to comment. :)

Sun, 01/22/2012 - 14:25 | 2086678 dark pools of soros
dark pools of soros's picture

coloring captcha!!

Sun, 01/22/2012 - 11:55 | 2086421 francis_sawyer
francis_sawyer's picture

"An executive summary in English would be helpful"


If the runaway central planners of the world believe they can legislate their way into an upper hand over the bond market, in ever more desperate attempts to avoid the day of reckoning, they will fail without any shadow of a doubt.

Time is running out... & gravity is rapidly overcoming the 'spinning plates' act...

Because demand for risk comes first and foremost from a sense of stability, of fair and efficient markets, and equitability: something which has long been missing in the stock market, and which may very soon be taken away, by force, from the bond market as well.

All markets are broken & beyond repair (IOW - the emperor has no clothes ~ it's just that nobody from THE EMPERORS COURT has pointed it out yet ~ and it just so happens that on their side are the armored bullies holding huge poleaxes)...


Now Tyler... Pretty please, if you have the time, could you translate the whole article into Suomi Ebonics (for the sake of us ' Finnish brothas')... Just kidding just kidding! GREAT POST!!


Sun, 01/22/2012 - 13:19 | 2086570 SMG
SMG's picture

Basically, the effects of the collapse of debt talks this weekend in Greece, could be much worse that is generally recognized in the mass media.   The artlicle provides many high quality data points to support this thesis.

However this does not prevent the Gloabal Oligarchs from pulling some magical solution, including changing/ignoring rules/laws, out of their ass and once again kicking the can down the road a few more months/years.

Sun, 01/22/2012 - 14:16 | 2086665 FeetOnTheGround
FeetOnTheGround's picture

I think that WAS the executive summary!

Sun, 01/22/2012 - 16:41 | 2086933 mattu13048
mattu13048's picture

Holy shit, check this out if you plan to trade next week: I would not touch NG even I was Arnold Schwarzenegger.

Sun, 01/22/2012 - 17:18 | 2086988 Money never sleeps
Money never sleeps's picture

These guys were up +42% last year. Money talks!

Sun, 01/22/2012 - 04:23 | 2086011 The Big Ching-aso
The Big Ching-aso's picture



All this will hit the fan when it's on high and oscillating.  Besides the Mayans said so - well I guess they implied it.  Although I can't read Mayan for shit to verify.  

Sun, 01/22/2012 - 04:30 | 2086024 The Big Ching-aso
The Big Ching-aso's picture



Greece's FICO is at 450.   Spain,  maybe 475.    Portugal, maybe 480.  The rest of the world is at 525.   It's like a global BK convention with idiot speakers.


Sun, 01/22/2012 - 04:34 | 2086028 Fips_OnTheSpot
Fips_OnTheSpot's picture

Woah there... so, "it is DOWN, not ACROSS"


Cant wait to watch the scene on Monday

Sun, 01/22/2012 - 04:34 | 2086029 James_Cole
James_Cole's picture

Excellent piece. 

Sun, 01/22/2012 - 04:45 | 2086042 Dr. Engali
Dr. Engali's picture

I don't believe you read it. I'm calling you out ;)

Sun, 01/22/2012 - 04:36 | 2086031 femme
femme's picture

What's this about efficient markets?

Sun, 01/22/2012 - 08:30 | 2086202 spankfish
spankfish's picture


Sun, 01/22/2012 - 04:38 | 2086034 Dr. Engali
Dr. Engali's picture

I'll have to file this one in the "too long,too tired ,and under the influence to read file".

Sun, 01/22/2012 - 05:03 | 2086057 LowProfile
LowProfile's picture

And yet you summon the will to inform us of this Earth-shaking point.

Where's that ignore button?

Sun, 01/22/2012 - 05:14 | 2086066 Dr. Engali
Dr. Engali's picture

Oh I'm sorry Mr. Pompassity that I didn't post something more pleasing for you to read. . The ignore button is to not read the post. Why don't you try pulling that broomstick out of your arrogant ass?

Do NOT follow this link or you will be banned from the site!