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

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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.

Continuing:

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.

Italy:

Spain:

Portugal:

Ireland:

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

 

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Sun, 01/22/2012 - 12:09 | 2086468 LowProfile
LowProfile's picture

The ignore button I want isn't to ignore your post, it's to ignore YOU and every other post you make, because it's a waste of time to have to skim past you.

And per the votes on these comments...   Survey says:  You're an asshole!

Sun, 01/22/2012 - 13:51 | 2086616 falak pema
falak pema's picture

never know, could be the south carolina crowd! anything goes with the red button Reps. No offence meant to Sweet Caroline. 

Sun, 01/22/2012 - 04:39 | 2086035 lasvegaspersona
lasvegaspersona's picture

Longest ZH article ever???

I went through 2 pairs of glasses and will require untwisting of the eyes.

Sun, 01/22/2012 - 13:27 | 2086581 CaptainObvious
CaptainObvious's picture

Perhaps, but considering the wealth of information Tyler posted and the fact that he's dead right, I don't consider it time wasted.  And I didn't have to spend a dime to read it, which is always nice.

Maybe next time he can present the same information in "Long But Correct Discourse of Why The World is Fucked, Part I", "Long But Correct Discourse of Why The World is Fucked, Part II", and "Long But Correct Discourse of Why The World is Fucked, Part III" so it's easier to digest.  And it ups the suspense for Parts II and III.  I know I need more excitement in my life.

Sun, 01/22/2012 - 04:43 | 2086041 honestann
honestann's picture

In one way, Greece does have the upper hand.

Just like any deadbeat who has been loaned boatloads of money by idiots, the more he pretends to "reform", the more money the idiots will give him.  Of course eventually Greece will default, but the longer they humor the idiots who loan them money, the more money they get to keep.  Very simple.

The only flaw in the equation is if somehow GoldmanShafts gets one of their perverts in power in Greece, at which time the entirety of Greece will be handed to the fiat, fake, fraud, fiction, fantasy, fractional-reserve creditors and the people sold into permanent slavery.

Sun, 01/22/2012 - 05:02 | 2086043 delacroix
delacroix's picture

ann, the 2 guys running greek finances, are( ex?)-goldman  papadimos, and venizelos, I believe. the greek peoples hands, are tied to their ankles.  the only reason, you would loan someone money, they couldn't pay back, is if they had something you wanted, that wasn't for sale.

Sun, 01/22/2012 - 05:12 | 2086065 Oh regional Indian
Oh regional Indian's picture

Well said Dela. Vampire S indeed.

ori

Sun, 01/22/2012 - 05:24 | 2086077 honestann
honestann's picture

I knew about "three card monti" in italy.  I didn't know about those scumbags in Greece.

Man, it is so far past time for the entire population of earth to become expert long-range marksmen.  Or to put it your way, they need their fingers tied to their triggers, their eyes glued to the crosshairs in their long-range riflescopes, and the predators centered in the crosshairs.

It is just in-freaking-sane that such a tiny percentage of humanity can be absolutely, completely, utterly, totally screw over the rest.  If anyone wrote a novel or movie 20 years ago that contained the events that are playing out today, nobody would have published it or believed it.  I'm not saying people didn't know corruption and bribes exist, I'm saying they'd never believe it could become absolutely, completely, utterly and totally dominant and in-our-faces.  Of course the other side of that coin is... nobody would believe such a small minority of mankind would see what is so un-freaking-believably obvious.

Sun, 01/22/2012 - 10:31 | 2086322 Everyman
Everyman's picture

You never read Ayn Rand?

Sun, 01/22/2012 - 14:13 | 2086661 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1  Let 'er rip ann!

Sun, 01/22/2012 - 10:17 | 2086313 PORTA PORTA
PORTA PORTA's picture

Ex GS are Paapdimos and Xristodoylou P ( the head of debd facility !! )

EX IMF is the head of Greek STATS ( he is already - since Fri - alng with Papandreou and ex Min FIn Papakonstantinou UNDER INVESTIGATION IN THE GREEK PARLAIMENT FOR MANIPULATING THE DEFICIT ( increased by 3-4% @ end of 2009... ( higher than Irelands'! )in order to enter the Loan Facility and INVITE IMF to Greece/Europe )

So the story will be written again..

Venizelow is a worthless piece of S.. Constitutional Law Professor, - NOTHING TO DO WITH FINANCE !!! ingorant and dangerous ! he is in thsi positon to cover the legal aspects of the collateralising Greek Asstes...

We have offshor jails in Greece...!! lol

 

PP

Sun, 01/22/2012 - 04:57 | 2086050 VanCity
VanCity's picture

That is one hell of an article, this is why I read RH. Thanks for the insight Tyler.

Sun, 01/22/2012 - 06:26 | 2086121 Major Loophole
Major Loophole's picture

Agreed..nuff said. And big thanks to TD & ZH

Sun, 01/22/2012 - 13:36 | 2086601 CrashisOptimistic
CrashisOptimistic's picture

I read it all.  Excellent work.

The level of complexity is at such a high level that if even the tiniest of segments is wrong, it all falls apart, but that is simply reality and not a flaw in the analysis.

I also note that there is no focus on the court venue of where any recourse would unfold.  This may be all that matters.  If you sue in Greece, you lose.  If you sue in Europe, you lose.

I guess the underlying point is that any lawsuit at all over any measure taken by Greece at all threatens all sovereign bonds.  Maybe that is the point that renders lawsuits all powerful.

Last comment, the amount of bonds held as the fulcrum power by the hedgefunds is small enough that one would think they could just be paid off.  9 billion Euros to get the whole thing done seems doable.  Just buy them off, let them make their big profit, and proceed.  Maybe the other banks are refusing to allow that.

 

Sun, 01/22/2012 - 14:16 | 2086668 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

An excellent comment, Crash, about the complexity allowing even a tiny part of the system to fail could bring the whole thing down.

Sun, 01/22/2012 - 04:57 | 2086052 j12t
j12t's picture

Now say the same thing in three paragraphs.

(This is marvelous. Thank you for existing!!!)

Sun, 01/22/2012 - 05:15 | 2086058 gun4A
gun4A's picture

looks like everybody shortin' eur now

would be a lot of fun in case eur was pushed even higher, i hope smart shorts are not going to cover above 1.30 and will double down

 

Sun, 01/22/2012 - 05:05 | 2086060 green888
green888's picture

This is the most fantastic analysis I have had the priviledge of reading, buy gold bitchez

Sun, 01/22/2012 - 14:18 | 2086670 DoChenRollingBearing
DoChenRollingBearing's picture

+ $1665 today

+ $55,000 sooner than you think

Sun, 01/22/2012 - 05:11 | 2086062 KlausK
KlausK's picture

So much for being a "paid gold pumping site". Great work. Keep it up - and watch out for those black helicopters!

Sun, 01/22/2012 - 05:13 | 2086068 unirealist
unirealist's picture

Impressive analysis.

So, the ultrarich, through hedge funds and lawyers, control the world through the bond markets.

It SEEMS impossible to get out from under their bloated and ruthless weight.  By protracted litigation they can even rape a country if it defaults--by locking up its future ability to conduct any kind of monetary trade.

Apparently there is only one way to dislodge the ultrarich, and that is for countries to CEASE TO EXIST.

Let us suppose, for example, that Greece DISBANDS its government and returns to being a land of city-states with no central governing political structures.

Then the ultrarich are, I have to think, SCREWED.

So there is the answer: a full reset of the global political scene.  The US can split into several entities, for example, and default on all its bonds.  How can the ultrarich hope to collect, if the Federal Gov't no longer exists?  How far would they get suing "The Pacific Northwest Liberal Republic," or, the "Bible Belt Midwest Republic of Jesus?"

Not very far, I think.

That is the only way to rid ourselves of these leeches.

Well, this is a fine mess you've got us in this time, Ollie!

 

Sun, 01/22/2012 - 08:39 | 2086204 spankfish
spankfish's picture

"The US can split into several entities, for example, and default on all its bonds.  How can the ultrarich hope to collect, if the Federal Gov't no longer exists?  How far would they get suing "The Pacific Northwest Liberal Republic," or, the "Bible Belt Midwest Republic of Jesus?" 

An Empire Wilderness: Travels into America’s Future by Robert D. Kaplan

Sun, 01/22/2012 - 10:11 | 2086309 Treason Season
Treason Season's picture

Nothing succeeds like succession!

Sun, 01/22/2012 - 10:43 | 2086337 new game
new game's picture

once i quit spending money i  didn't have, my credit score went to 800 plus.

ironically i don't use credit. if anyone of these nations gets cut off from the credit markets; could that be bad?

and then the politician becomes what he is - a fraud; when the people direct there anger accordingly, we will see real change...

 

Sun, 01/22/2012 - 12:41 | 2086519 RiverRoad
RiverRoad's picture

Or war.

Sun, 01/22/2012 - 11:05 | 2086371 Gordon Freeman
Gordon Freeman's picture

@Unirealist,

Seems to me your evil "ultrarich" are only squeezing countries that have run up debts they had no intention of paying.  Is that your beef?

Tough shit, baby...

Sun, 01/22/2012 - 05:23 | 2086082 1929agin
1929agin's picture

*PS* Ponzi scheme, sadly, the world Pagans,  continually misled by the  Media, Fed, ECB, printing ( Ponzi scheme ), "truth, you can't handle the truth"

 

 

Sun, 01/22/2012 - 05:41 | 2086094 tbd108
tbd108's picture

The real issue is that turnips do not yield blood in UK or Greek courts.

Sun, 01/22/2012 - 08:52 | 2086215 spankfish
spankfish's picture

The return of "turnip winter", an economical frost that will kill more than potatoes.

Sun, 01/22/2012 - 06:01 | 2086105 Dick Darlington
Dick Darlington's picture

Awesome analysis Tyler! Cannot thank You enough for the limitless efforts You go through in digging these things out! Very good!

Sun, 01/22/2012 - 06:58 | 2086113 falak pema
falak pema's picture

+100 This is the first comprehensive and detailed paper I have seen on the subject, and its depth and details, and background legalese, is just breath taking. You deserve the Nobel Prize of financial journalism on this if your analysis is SPOT ON; something I cannot vouch for myself, but have no reason to doubt given all the evidence provided.

The figures you project on national debt levels I have checked with other sources and it all fits together.

So only one thing to say, giving you benefit of doubt : BRAVO!!!

I HOPE THIS GETS PUBLISHED AND COPIOUSLY COMMENTED  ACCROSS ALL THE INTERNET SITES WHO ARE CONCERNED ABOUT THIS EARTH SHAKING FINANCIAL ISSUE.

 

Sun, 01/22/2012 - 08:54 | 2086219 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Not sure why you got a down vote. Perhaps because you mentioned the Nobel Prize which is totally corrupted, certainly after Barry got one.

Sun, 01/22/2012 - 08:57 | 2086222 falak pema
falak pema's picture

lol, its just an iconic reference and one black sheep don't mean the whole troop is gangrened; no pun intended.

Sun, 01/22/2012 - 09:33 | 2086260 Börjesson
Börjesson's picture

As a Swede, I would like to point out that the Nobel Peace Prize has been outsourced to the Norwegians. They were the ones who chose to award O'Bummer one - apparently as an encouragement for him to earn it retroactively, if you can believe it. (To his credit, O'Bummer did seem a bit embarrassed at the award ceremony.) That the "norrbaggar" have lost their marbles doesn't necessarily impugn the other Prize categories. (Though admittedly, the Economy Prize, which is the one for which Tyler just applied, is strange too, and not a real Nobel Prize to begin with.)

Sun, 01/22/2012 - 12:03 | 2086458 francis_sawyer
francis_sawyer's picture

Well, at least it's still made of gold so it has SOME value...

*The Nobel Prize medals consist of 18 carat green gold plated with 24 carat gold. Before 1980 they were struck in 23 carat gold...*

My advice would be to win one ASAP (before it turns to zinc plated tungsten)... Or worse... COTTON...

Sun, 01/22/2012 - 11:19 | 2086388 Spastica Rex
Spastica Rex's picture

I'll post it on Facebook.

Sun, 01/22/2012 - 15:02 | 2086752 RiverRoad
RiverRoad's picture

I only wish you could.  I can't, as I refuse to join that medium.  If only there were some way to wake up all those folks asleep at the wheel before they hit the wall at 90 mph.

Sun, 01/22/2012 - 06:22 | 2086119 foxenburg
foxenburg's picture

"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"

Yeah, a good early Sunday morning read with a cup of tea in bed. I dont think it's fair to use the word 'pretense' any more than calling hedge funds a 'cartel'. The reasons to sue are legitimate and anyone can join this cartel, which is practically the antonym of one.

On a more prosaic note, shorter paragraphs would make articles easier to read.

 

Sun, 01/22/2012 - 06:27 | 2086120 AUD
AUD's picture

The part I found most interesting is the Hedge Funds ability to successfully litigate to seize the 'assets' of debtor sovereigns held with foreign central banks. This would automatically devalue the local currency.

I can see various shaky debtors withdrawing their 'assets' from such danger, like say Venezuela, but at the same time this would seem to be breaking links in the global financial chain. The debtors might even ask for their assets in gold rather than physical $ or Euro's.

Sun, 01/22/2012 - 09:41 | 2086266 roy10
roy10's picture

You cannot seize assets of a sovereign. It simply cannot be done. Litigation is meaningless beyond its nuisance value. This is not a private corporation.

Sun, 01/22/2012 - 09:53 | 2086283 gmak
gmak's picture

ONe word: WAR.

Sun, 01/22/2012 - 09:56 | 2086290 roy10
roy10's picture

Do hedge funds have tanks now?

Sun, 01/22/2012 - 13:34 | 2086592 CaptainObvious
CaptainObvious's picture

They don't need 'em.  They have the money to buy armies to do that for them.

Sun, 01/22/2012 - 13:58 | 2086627 rayduh4life
rayduh4life's picture

If not, they can always rent a few from Black Water.

Sun, 01/22/2012 - 11:59 | 2086445 Bobbyrib
Bobbyrib's picture

Did you even read the article? The vulture capitalist and private banks (if they are successful in court) who buy these junk bonds have the power to institute the equivalent of sanctions on countries who refuse to pay. I can't believe how much power Financial firms have in our country. I understood Goldman pretty well, but this is "mind blowing" for me.

Sun, 01/22/2012 - 06:31 | 2086125 emsolý
emsolý's picture

Gresham's law in Greek bonds: bad ones (Greek-law) to ECB and dumb banks, good ones (UK-law) to hedge funds 

Sun, 01/22/2012 - 06:45 | 2086129 evolutionx
evolutionx's picture
Euro Collapse Explained in 3 Minutes

Reflections on Europes financial woes. Special subject: the economies of the European Community. Which debt is owed by whom? Who will pay the bill?

Why make it so difficult?  its so easy to understand:

http://www.webcompact.net/index.php/news/4795-euro-collapse-explained-in-3-minutes-

Sun, 01/22/2012 - 06:51 | 2086134 falak pema
falak pema's picture

hilariously chillsome!

Sun, 01/22/2012 - 09:39 | 2086264 roy10
roy10's picture

"Where is the money for the bailout coming from"? They are printing it.

People need to move on – bailouts are yesterday’s news. We have gone past that phase. The new game in town is the ECB massive printing machine, which puts Bernanke to shame. As long and the presses are working, any fundamental questions about solvency are meaningless. 

Sun, 01/22/2012 - 06:45 | 2086130 Padrone
Padrone's picture

So sounds to me like a big bang coming of restructuring the PIIGS debt once, force a nice big haircut on all debt holders then start issuing debt on EU level, with new protection laws enticing investors.

Sun, 01/22/2012 - 09:31 | 2086257 roy10
roy10's picture

Not really. It's going to be a very slow bang, in which the restructuring is done over years and years. We will probably see this unfold for around a decade.

You don't need to entice anybody to buy bonds when you can simply print and buy them. People are ignoring the very simple fact that the ECB is buying a huge chunk of the bonds (directly and through the LTRO), so no “fundamental” demand is actually needed from markets.

There will be no Euro-Bonds. ECB will continue to backstop PIIGS bonds and they slowly restructure during the next decade.

Sun, 01/22/2012 - 14:19 | 2086672 taraxias
taraxias's picture

You keep spewing thsi over and over. Let me keep it short. YOu.ARE.WRONG.

They don't have a decade, the US doesn't have a decade, Japan doesn't have a decade, no one has a decade.

The "can kicking game" had diminishing returns and interventions have shorter and shorter life spans.

No one has a decade.

Sun, 01/22/2012 - 14:32 | 2086689 dark pools of soros
dark pools of soros's picture

parabolic due from misunderstanding the distructive power of exponents....which is why financial firms are hanging out with scientists, etc to go deeper into this black holenomics 

Sun, 01/22/2012 - 14:36 | 2086698 roy10
roy10's picture

I may be wrong - it's just an opinion. How long can a bubble last? It's anybody’s guess. All I know is that the ECB printing brought short-term rates for Italy/Spain down from 7% to 1%-3%.

The question is how long can the ECB print without a complete loss of confidence in the Euro? I think it go on for years, though there’s no way to really tell.

Sun, 01/22/2012 - 18:37 | 2087096 PhattyBuoy
PhattyBuoy's picture

Unlimited (ad infinitum) printing (on both sides of the pond) is a scorched earth policy that will consume the planet in a destabilizing hyper-inflationary fire (war).

Arab spring goes global ...

Sun, 01/22/2012 - 06:47 | 2086133 steve from virginia
steve from virginia's picture

 

Excellent analysis. Much of this is speculation, but the actions of the vultures is well known. They are in action in Iceland (Hudson) and will certainly emerge in Italy, Ireland and Portugal.

"... 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."

Unfortunately, the credit markets are already at that point.

 - Central banks are the last line of defense,

 - Recoveries by litigation-first 'vulture' shops HAS been high but this continuing requires the courts to have some sort of traction. This assumption is tied to another:

 - That 'modern' nations have an ongoing need for access to international lenders. Under some circumstances this is true but is NOT RELEVANT to the energy crisis that is unfolding. Like the other modern nations, Greece needs $20 per barrel crude. Anything more bankrupts the country. Expensive fuel paid for in hard currency is WHY Greece is having borrowing/repayment difficulties.

Greece borrows billions of euros to buy imported crude which it then burns up in ways that do not provide a return, requiring Greece to borrow more. No wonder Greece and the rest are bankrupt!

Albania did not participate in European debt markets until after the end of the USSR and Enver Hoxha died. THAT Albania is where Greece -- and much of the rest of Europe -- is headed.

 

Sun, 01/22/2012 - 11:08 | 2086373 GeneMarchbanks
GeneMarchbanks's picture

'Much of this is speculation, but the actions of the vultures is well known.'

I'd say too much of this is speculation and over-reaching play out scenarios.

The Anglo-Sphere has played the EZ perfectly however anyone who thinks a long drawn out legislative process and voting is going to settle this is not familiar with Southern European culture.

Sun, 01/22/2012 - 07:15 | 2086143 MsCreant
MsCreant's picture

These people are savages. This is a chess game being played out with people's lives. It feels like everyone forgets this. We blame the sheep for being stupid here, and often. But you know what? The wolves are so Goddamn greedy, I think they are going to fuck this up and get nothing!!!

Parasites killing the host.

 

Sun, 01/22/2012 - 09:07 | 2086233 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Well, everybody is bankrupt so whatever happens, the vultures won't get their money period. Ok maybe technically they will, but only after hyperinflation so the money would be worthless. It's almost game over for them.

I'm sure they have gold too so they'll survive.

 

Sun, 01/22/2012 - 11:10 | 2086376 roy10
roy10's picture

Who are the savages exactly? Hedge funds?

Sun, 01/22/2012 - 13:04 | 2086548 RiverRoad
RiverRoad's picture

MsCreant:

 

Agreed.  When capitalism is so hell-bent on destroying itself, why do we even bother inventing enemies?

Sun, 01/22/2012 - 07:17 | 2086145 morisu
morisu's picture

I think the what most of us want to know is how the central planners will try to prevent this. I think EU/IMF will give Greece the money to pay 100% to all the hedgies not submitting to the haircuts. Even though they said they wouldn't be shoveling money down without the deal. So, hedge funds get their big win and Soros's name will once again be in tabloids. EU will once again turn back their words and not honour what they promised. They WILL give money to Greece. Stock markets will not crash (yet).

This only postpones the situation a tiny bit further. Now the latest bailout money won't last for all planned debt repayments and new bailout will be demanded by eurotrash like Rehn. This time though Holland, Finland and Germany will say no and will see nice July crash for this year also. Remember, markets will always stay insane longer then we expect.

Btw, we nice sum-up. I especially liked those hedge funds vs sovereigns law suits. I wasn't aware of that kind of thing beeing possible earlier (some one actually winning and getting paid). Even though it took me almost an hour to read this, thanks Zero Hedge :)

Sun, 01/22/2012 - 09:28 | 2086248 roy10
roy10's picture

The EU will NOT payoff hedge-funds. They will be forced into the deal (there is no real real legal recourse against a sovereign). If you look at Spanish/Italy bonds, the ECB has clearly been able to firewall them from the Greek mess and the yield have been declining steadily throughout the Greek saga.

I think the EU should be glad to test this firewall, since having it hold would pretty much bring the notion of contagion to an end and rally markets even more.

Sun, 01/22/2012 - 11:15 | 2086384 Gordon Freeman
Gordon Freeman's picture

You didn't actually read the article, did you (moron)?

Sun, 01/22/2012 - 11:29 | 2086392 roy10
roy10's picture

Yes I did. Was the article written by someone from the future (moron)?

If you are saying that US/EU would seize Greek assets (as if Greece was Peru or Yemen), you sre either clueless or stupid (my guess is both).

Sun, 01/22/2012 - 07:18 | 2086146 celticgold
celticgold's picture

sheeeeit..... i knew that!

Sun, 01/22/2012 - 07:26 | 2086152 Canucklehead
Canucklehead's picture

Thanks for the article.  Your writing style is valued and your attention to detail is impressive.

Sun, 01/22/2012 - 07:38 | 2086159 snowlywhite
snowlywhite's picture

good article

Sun, 01/22/2012 - 08:00 | 2086175 Scalaris
Scalaris's picture

I've just scrolled down here to tell you that I'm about to start reading your mini Iliad, and that I hate you for making me do this on a Sunday.

Sun, 01/22/2012 - 08:04 | 2086177 HD
HD's picture

It's unfortunate that the Tyler's have to remain anonymous - because this site deserves a Peabody Award. And just to be clear, that is not intended as humor or sarcasm.

Zero Hedge raises the individual and collective intelligence of it visitors whether they like it or not.

A sincere thank you to all those behind the curtain at Zero Hedge.

 

Sun, 01/22/2012 - 08:52 | 2086214 Irish66
Irish66's picture

I agree.  I have been schooled this morning and have all my questions answered.

Funny, for some thought we could ignore Greece and be done with it but now we see

that text books will be written on the outcome of this and they will impact the bond market

across all countries.

Thank you Tyler's.

Sun, 01/22/2012 - 08:11 | 2086182 Dempster
Dempster's picture

Fascinating stuff.

Excellent article.

Sun, 01/22/2012 - 08:16 | 2086187 spankfish
spankfish's picture

As soon as I read the first line Subordination 101, I  immediately thought of subornation of perjury.  Funny.

Sun, 01/22/2012 - 08:41 | 2086191 virgilcaine
virgilcaine's picture

The CDS will expire worthless, the Greek bonds take an 80% haircut and good luck finding a venue to sue.  Next case up. I don't see how the Bonds can be worth even that considering the state of their economy, whatever subprime bonds were worth in 08 that's my feeling on the value of Greek debt.

Life was so much simpler back then..I think in the end everyone picks up their marbles and goes home empty.

http://www.mmc.com/knowledgecenter/viewpoint/A_Brief_Review_of_Subprime_Securities_Litigation.php

Sun, 01/22/2012 - 11:23 | 2086391 GeneMarchbanks
GeneMarchbanks's picture

'I think in the end everyone picks up their marbles and goes home empty.'

Well, yes, correct, affirmative.

'One mustn't ask apple trees for oranges, France for sun, women for love, life for happiness.'
Gustave Flaubert

He who doesn't understand this, is going home empty handed.

Sun, 01/22/2012 - 12:01 | 2086456 Bobbyrib
Bobbyrib's picture

Yeah, one of the only things I thought of that wasn't covered by the article is: "what if the EU tells the American investors where to go and how to get there (to put it nicely)."

Sun, 01/22/2012 - 14:09 | 2086653 RiverRoad
RiverRoad's picture

And what a wonderful time they'll have when they get there (to quote the Irish.)

Sun, 01/22/2012 - 08:47 | 2086212 Scarletfire
Scarletfire's picture

some one was a busy bee!!!   thanks for the work

 

Sun, 01/22/2012 - 09:10 | 2086213 knukles
knukles's picture

Hah ha
A post that only a bond Geek (sp?  Is the R silent?) could love.

Not to mention the second derivative, the convexity like impact, if you will.

All the Greek debt in question is denominated in Euros (actually spelled "GeuYros" phonetically treated like the famous lamb delicacy but the G and Y are silent) whcih means....
Ta Dah!
Alongside the first order effect of the default negatively imacting (polite subtle reference) Greek, then PIIGS followed on by All European debt...

There will be a gulit by associative order parayalsis spilling over into the Euro.  Not as we are all aware of the Euro being a failed currency simply waiting for an End of Times excuse for the Abortion Of Final Ethnic Euthanization (which a Greek event may well in and of itself not be) but there may likely be an immediate knee jerk, kick the can reaction (a la It's a Mad, Mad, Mad, Mad World) wherein all Euro denominated obligations risk premiums expand accomanying the Greek matter.
This comes to mind simalar to the US dollar's declines fueled by the GM and Chrysler abrogation of senior debt holders rights by the government, the very same folks trusted to preserve and defend such.  Essentailly making the US Rule of Law substantially impaired (What a bonus for the Banksters, an Impaired Rule of Law... my oh my how it all fits together.) the only mechanism to properly reflect such risk was a decline (relative) of the US dollar.
Well, will likely happen with the Euro. 
By this I do not refer to the "golly gee Mr. Wizard" fact that it will have a negative effect on the currency.  That's already known to anyone other than masterbatory CNBS eaters and the like.

It is essentailly greater than that, longer lasting, deeper and more profound.  And much more subtle, dogging the credibility of the entire European legal infrastructure into the future.

For similar reasons, that was a primary motivating factor post GM and Chrysler, that the non US $'s bounded by the rule of descendent English law proved so attractive.  And will likey do so in the future once again as the immediacy of US dollar attactiveness diminsihes as the "only the best port in the storm return-of-my-money" attractiveness fails as the European specter diminishes at some point.  (Same derivatives should logically boost the PM's as rules of law worldwide fail.)

Many second and third order effects which will flow directly from the specifics and treatment of the "legal mumbo jumbo fine points" within the four corners of the deal documents and indentures (where any even exist).
Only a bond daddy gets excited about this kind of stuff at 3 a.m.
About a good as it can get.

Many thanks, Tyler.  You dah man!

Sun, 01/22/2012 - 14:40 | 2086702 DoChenRollingBearing
DoChenRollingBearing's picture

Very good reply knukles, + 1

Mon, 01/23/2012 - 00:12 | 2087590 darkpool2
darkpool2's picture

I smell a new competitive advantage for London over the other European financial centers. Since the UK has never been a big fan of anyone and anything across the Channel, shouldnt be too hard to push the knife in----- and add a sharp twist. Will only work for the AAA ( and aspiring crowd) but it does sort the men from the boys......tally-Ho

Sun, 01/22/2012 - 09:00 | 2086224 q99x2
q99x2's picture

Let the wealthy suffer in their savage lawlessness and the poor be blessed by the rule of law and their ignorance of it.

Sun, 01/22/2012 - 16:53 | 2086938 Goldilocks
Goldilocks's picture

How about we use the same yardstick for both (the wealthy & the poor)?

Sun, 01/22/2012 - 21:24 | 2087310 knukles
knukles's picture

Because without a Yardstick Equivalency Measurement, Reconciliation, Rectification and Affordabilty Program the poor could not afford the yardstick, the probability of which being passed is negligible for there are no offsetting expenditure reductions or tax increases to counterbalance the empty promises which likewise fall short, the magnitude of which cannot be discerned in the absence of such, and will thus be addressed upon return from the 2013 solar equinox break if a bipartisan agreement there upon can reasonably be reached.

Perhaps it's best addressed after the elections.

Sun, 01/22/2012 - 22:25 | 2087343 Goldilocks
Goldilocks's picture

+1 "unique sentence award" ‘;-)
(sorry knukles, I’d say more, but I ... didn’t completely understand it.)

Sun, 01/22/2012 - 09:02 | 2086225 virgilcaine
virgilcaine's picture

Tyler, were approaching the 'marble moment'.. when everyone involved picks up their collective marbles and goes home. The outcome when everyone misbehaves and doesnt play nice. Though At the moment their still fighting in the playground.

As you can see with subprime sueing a bankrupt party is futile.

Sun, 01/22/2012 - 09:06 | 2086231 847328_3527
847328_3527's picture

Excellent analysis....I have to read it several times but well well worth it..and it's well worth understanding......it's a free education!

Thank you!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Sun, 01/22/2012 - 09:17 | 2086238 Irish66
Irish66's picture

OT not really.

Finland is going to a run off in their elections.  Outcome very important to the euro

Sun, 01/22/2012 - 09:18 | 2086240 Spigot
Spigot's picture

Summary: You are all fucked and going to hell.

Reminds me of a guy walking around in his basement using a BIC lighter looking for a gas leak.

I know there was no intention to include this in the article, but Greece is ALREADY in completed social breakdown. What do you think will happen if it is reduced to a cash and carry economy? (both internally and externally). Not pretty. And the "I will get back at you sons-of-bitchs" vendetta on the part of a huge population of very pissed off Greeks against any and all perceived "agents" of thier demise will be a difficult thing to deal with.

And that is just Greece. What about the rest? What about Itally? Can the banking systems of the world endure once this chaos is triggered? At some point the match will be lit and the world will go up in flames.

Sun, 01/22/2012 - 12:22 | 2086493 gnomon
gnomon's picture

Spigot,

You are correct, and those forecasting a long, drawn-out, legalistic, ponzi-fueled process encompassing a decade are WRONG.  The world does not stand still in the meantime or stay calm when more babies continue to be born and growth is at a standstill or in reverse.

The real physical world always trumps Man's Machinations.  

Sun, 01/22/2012 - 14:42 | 2086708 DoChenRollingBearing
DoChenRollingBearing's picture

+ another spigot.

I just want Italy to hold together for ONE LAST TRIP there with my wife!  Just a little longer, guys!

Sun, 01/22/2012 - 19:56 | 2087197 respect the cock
respect the cock's picture

Me too.  We're going in May.

Bought trip insurance just in case.

Sun, 01/22/2012 - 09:29 | 2086252 Invisible Hand
Invisible Hand's picture

Excellent article.  My wife and I read (and discussed) this over breakfast and learned a lot.

One question for Tyler:

Why hasn't the GM and Chrysler cramdown by the US govt of corporate debt (in favor of their big contributors, the unions) had any apparent effect on the corporate bond market in the US?

I understand why actions that might be taken by Greece should destroy the sovereign bond market but similar actions in the US in the corporate bond market seemed to be glossed over and forgotten.

The legal system completely rolled over and offered no protection to bondholders in the GM/Chrysler case and no one seemed upset.

Same (so far) in the MF Global case.  Outside a few small and isolated voices, no one (appears) to find the implications of that blatantly illegal fleecing of investors upsetting.

The rule of law appears to be a lot more fragile than I (for one) thought it was and there appears to be no large, public outcry over its demise.

Tyler: Any thoughts on all this?

Please note: Not being critical of the article's points, I just don't understand why other instances of the loss of investor protection are not, apparently, considered outrages.

Mon, 01/23/2012 - 06:09 | 2086480 HD
HD's picture

 If I were to take a guess...

The auto bailout was seen as one off - there was not a line of other (GM sized or larger) bailouts waiting in the wings. It was one and done.  Greece however, is just the first domino of many - and of course the PIIGS debt amounts are staggering compared to the little ol' auto bailout.

Sun, 01/22/2012 - 12:23 | 2086487 Al Gorerhythm
Al Gorerhythm's picture

You print some money and you pay people to keep quiet. Otherwise you just print some money, buy the asset (barf) and load it onto your balance sheet. Furthermore, you could print some money and swap it with other foreign CBs so as to perpetuate the queationable strength of the US$, paying off foreign debt (bond) holders or asset holders seeking dollars for margin calls. Or...... ad infinitum...... smoke and mirrors tactics galore. They keep pulling them out of the hat, until they can't. The last shoe is on its downward trajectory.

Slick an' easy.

Sun, 01/22/2012 - 14:01 | 2086625 Schmuck Raker
Schmuck Raker's picture

While you wait for an intelligent, knowledgeable respondent I'll throw this out for you to consider.
I think you have made a basic error by comparing the 'Apple' of corporate debt to a sovereign debt 'Orange'.

Lenders expect to be paid interest based on the income of the borrower, profits in the case of corporations or tax receipts for sovereigns. Failure to pay results in lenders receiving assets as compensation. Now, what assets are available to bondholders of corporations? And what assets are available to bondholders of sovereign nations?

As Tyler facetiously alluded to, you'd have a very hard time taking delivery of the Parthenon, or occupying Corfu.
On the other hand, a Camaro you can take home, hold title, register, drive, or let your teen-aged son wrap around a tree on Prom Night.

Ultimately an owner of sovereign debt must rely on 'The Full Faith & Credit' of the nation when the investment heads south. That is a whole different ball of wax.

[I may have no idea what I'm talking about.] ;)

Sun, 01/22/2012 - 14:48 | 2086719 DoChenRollingBearing
DoChenRollingBearing's picture

@ Invisible

Good questions.  Each of these episodes will grind out any trust that we have in the bond system.  I believe it may come down to a Jubilee.

Or hyperinflation.  Worldwide.

Either way, gold will be a great asset to own.

Sun, 01/22/2012 - 09:30 | 2086254 XRAYD
XRAYD's picture

Merkel has the upper hand uber alles because she knows that the Euro will survive only if the PIIGS survive.

Sun, 01/22/2012 - 09:44 | 2086274 airedalesrule
airedalesrule's picture

This is very good work and an example of why ZH is rendering most financial media obsolete. Thanks.

Sun, 01/22/2012 - 09:52 | 2086282 PORTA PORTA
PORTA PORTA's picture

this is all bs...

 

why you even bother writting i million words to reply on Philips half a page post ??

FYI HAS ALL THE LEVERAGE in the WORLD right now, BUT we'e governed by GOATS, and worthless whitecollar criminals.

FYI (2) on Jan 20th, the 2 FInancial Attorneys.. nailed Papandrepou and Papakonstantinou and their "man" Georgiou- who is the head of Greek Stats ex GS!!  - on the charges of Voluntarily MANIPULATING the DEFICIT incerasing it volunterily 3-3.5% at the end of 2009!!!! IN ORDER TO ENTER THE IMF LOAN FACILITY....

THE CRIMINALS BROUGHT THE IMF TO EUROPE...

THE STORY WILL BE WRITTEN AGAIN.. FOR THA SAKE OF TROUTH AND JUSTICE n f* THE BANKERS' WAY !

 

pp

Sun, 01/22/2012 - 09:53 | 2086284 PORTA PORTA
Sun, 01/22/2012 - 23:39 | 2087540 gravedestruction
gravedestruction's picture

Prophet from the grave,

Brighter than a thousand suns...

Sun, 01/22/2012 - 09:53 | 2086285 vh070
vh070's picture

Cracking read!  I'm reaching for some bandaids now...

Sun, 01/22/2012 - 09:54 | 2086287 Misean
Misean's picture

"The IMF may get paid back, but Greece will say goodbye to half its islands and historical monuments in the fire-sale that precedes."

Really? Who's going to force the sale, the Wermach?

Sun, 01/22/2012 - 10:00 | 2086297 roy10
roy10's picture

People seem to ignore the fact that Greece is still a democracy and you can only push the people so far. At some point they will replace the government and the IMF will get squat.

There will be no Island or monument sales.

Sun, 01/22/2012 - 09:58 | 2086293 props2009
props2009's picture

C3X performance: 1500 pips in January 2012 over 46 trading calls with a sucess ratio. This comes after 6 months of over 2000 pips per month in 2011. Capital3x has been in existence for 6 months and uses bond market data to trade FX specialising in EURUSD, AUDUSD, USDCAD,USDCHF, ES, GOLD.

 

http://capital3x.com/think-tank/capital3x-fx-portfolio-performance-for-w...

Sun, 01/22/2012 - 10:06 | 2086301 Miss Expectations
Miss Expectations's picture

Who gets the Acropolis (high city)?

I think that I now understand Jon Corizine's all-in play for European sovereign debt. 

"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."

I wonder how much he owned?  Who owns it now?  Did JP Morgan get it for free?

Thank you Tyler, for this amazing work. 

Sun, 01/22/2012 - 13:21 | 2086562 infinity8
infinity8's picture

My thoughts went down the same path. Soros bought - ? - about $2B, if I remember correctly, mid Nov. Going to track that down now.

 

Here's something:

http://online.wsj.com/video/george-soros-to-cash-in-on-corzine-mess/F7C6...

of course, interpreted as "bullish" - hahahahaha!

Sun, 01/22/2012 - 10:10 | 2086304 jesus_quintana
jesus_quintana's picture

Fantastic article Tyler. I'd love to see that cusip list if you are prepared to share it? (I guess I could recreate it tomorrow from bberg with a bit of work, but if it's good to go already then it would be very much appreciated).

Cheers,
JQ

Sun, 01/22/2012 - 10:11 | 2086307 Thinkor
Thinkor's picture

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 Troika bailout fund is in fact something less than this, because Greece is a sovereign nation and a people, not an insolvent corporation, even though the EU is trying to treat it as such.

Greece can pay whom they wish as little as they wish and they can refuse to deliver the collateral (assuming it to be islands and monuments under Greek control).

If the Greeks figure this out, they will then be prepared to negotiate a settlement that will split the losses that have been realized but remain undivided.

Negotiations will be difficult.  A settlement of equal division of the losses between debtor and creditors would destroy Greece, while a settlement in proportion to the GDPs involved would leave the creditors with very little.

It's easy to see why globalists want to eliminate national sovereignty, why depressions lead to war, and why nationalists want to eliminate globalists.

 

 

 

 

 

 

Sun, 01/22/2012 - 10:25 | 2086318 PORTA PORTA
PORTA PORTA's picture

The German KG_Market_PONZI

http://www.scribd.com/doc/77625189/German-KG-Market-PP

 

dedicated to Merkel and Ackermann ( who's is also a doctor )

PP

Sun, 01/22/2012 - 10:32 | 2086320 cranky-old-geezer
cranky-old-geezer's picture

 

 

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 [on Greek sovereign debt]? Go sue in an Athens court; good luck to you.

This might be the most significant statement in the article.

Trying to get a contract enforcement judgment against a government in a court controlled by that government is futile and foolish.

This is the ultimate manifestation of counterparty risk, and the best reason to stay away from anything involving counterparty risk, which is every single bond out there ...and futures contract as we now know from the MF Global bankruptcy.

Bottom line, these peple simply aren't going to honor the terms of the contract if they can find a way out of it.  They're not going to pay you what that piece of paper says they will pay you.

You're not buying an asset.  You're buying a PROMISE TO PAY an asset at some future date.

People's promises are worthless these days.

Invest in things that DON'T INVOLVE ANY PROMISES to pay something in the future.

Invest in things you can take possession of NOW.

 

 

 

Sun, 01/22/2012 - 10:45 | 2086339 PORTA PORTA
PORTA PORTA's picture

FYI out of 360b E debd, 230b is interest and 130b is capital. = FACT !

what the F* they put on the table for haircut?

What exactly are the bondholdrs losing ? CAN YOU PZ ANSWER me ? The value of their profolio ?

You tell me and ia will tell you about collaterals and future IOU's.

THA GAME HAS A NAME. GRECCE'S OIL AND NATURAL GAZ RESOURCES. !!!

IRAN/RUSSIA are heating Merkels' fat aSH.. Lybia is far and under US and French jurisd. What is left ??

Cypus?? ( US & DELEK-Israel)

 

PP

PS there has been no officail DD on the Greek dedt here in Greece....

PS2. since 1981 we have paid 481b in interest and cap.( official EU data )... so we re not poor or insolvent !

Sun, 01/22/2012 - 11:04 | 2086369 cranky-old-geezer
cranky-old-geezer's picture

 

 

PS2. since 1981 we have paid 481b in interest and cap.( official EU data )... so we re not poor or insolvent !

Yes your govt IS poor & insolvent.

When a government has to start borrowing money to keep operating, YES that government IS insolvent. 

Borrowing just delays the bankruptcy part of it.

An yes, "delay" is the proper term.   Because that borrowed money will NEVER be paid back.

The Greek people have payed bankers 481 BILLION (dollars, euros, lira, whatever) of interest since '81?

That's 481 billion that could have been kept in YOUR pockets if your government wasn't so IRRESPONSIBLE and CORRUPT.

Sun, 01/22/2012 - 13:28 | 2086582 PORTA PORTA
PORTA PORTA's picture

do you know which countrie in EZ have deficit 3% or less ?? 3.. NOT FRANVE and NOT GERMANY.

everybody is borrowing money.

BUT

when you have Simens and Ferrostaal bribing Greek Politicias to BORROW and they deliver ie. tilted subs....

or German coutrs have found that they received money for 4 subs and delivered 3... who's fault is it?

Greece's ? Germany's ? both ?

Now the want the GREEK SUN loll to export 10GW solar to Germany....

French want new deals on new battle ships. US wants to sell F35's like in Turkey...!

Our neighrborhood is peculiar.. and the DOGS of LOANS know this and they ALL fEED the NEED for LOANS...

Thats how we keep German and French workers in their JOBS !!! u get the picture?

deleveraging is an art

 

PP

 

 

Sun, 01/22/2012 - 11:57 | 2086446 NoTTD
NoTTD's picture

Do shut up.

Sun, 01/22/2012 - 13:22 | 2086573 PORTA PORTA
PORTA PORTA's picture

? have a Brain Facility for you. Low interest. as many rollovers u wish.-

PP

Sun, 01/22/2012 - 10:34 | 2086326 BandGap
BandGap's picture

That was the best synopsis I have ever read concerning this mess.  The Greek situation is both the catalyst for the implosion, easily the worst case scenario, and a model for understanding the overall debt picture. I now better understand that this is no painless way out of this global mess.

Thank you Zerohedge. I was once blind.

Sun, 01/22/2012 - 10:36 | 2086330 chinaguy
chinaguy's picture

Truly excellent article. Explains what I have been seeing in these HY issues and the EUR shorts...Thanks

Sun, 01/22/2012 - 10:37 | 2086332 Dr. Gonzo
Dr. Gonzo's picture

So in a nut shell the strategy is for the ECB to print as much funny money as necessary become the super majority bond holder so it can legally dictate the terms of the "non-bankruptcy" to the world outside of a bankruptcy court meaning derivatives won't be triggered and their house of cards won't come crashing down? They just need enough time and distraction to print all that money and find as much bad Greek debt to buy up as covertly as they can so they can be the super majority? And since they are taking the trouble to use their privilege (more of a birthright) to print money from nothing to charge interest just to bail out this little black hole this new super majority bond holder will need to be compensated in a way that will give them title to the entire nation and make it's people and their descendants their oppressed slaves for eternity? Sounds like a fair deal. I don't know why honest people still insist that gold should be used as money. With the limitations of gold as money the Central Planners couldn't 'help' the people they way they are now. When they stamped words like liberty on our old gold/silver money they just didn't understand how great a fiat money system can work for the people. We're seeing it in action today and every morning I get to turn on CNBC and listen to those wonderful people sort it all out for me. 

Sun, 01/22/2012 - 11:04 | 2086364 itstippy
itstippy's picture

My Brother-In-Law will NEVER be able to repay the money he's "borrowed" from Mrs. Tippy over the years.  No amount of austerity or job-hunting will put him into a position to repay.  He lives poor and has a minimum-wage job and that's how it is.  When he needs new eyeglasses or is in arrears to the gas & electric company or some other fiscal emergency he "borrows" the necessary funds from Mrs. Tippy to stay afloat.  The House Of Tippy is under no delusion that we'll be paid back.  We pretend to "loan" him money.  We don't keep the "loans" on our books as assets.  We also have no obligation, moral of legal, to make good on money he owes other parties who stupidly believe they'll be paid back.  This keeps the situation contained, except for hard feelings from other peripheral Tippy-clan members who are denied similar financial arrangements.

So, how's the containment of Greek insolvency going to go?  About as well as sub-prime MBS containment, judging from this excellent article.   Too many institutions have Greek shitbonds on their ledgers as "assets"; too many PIIGS-clan members will demand similar financial arrangements for their own shitbonds (which are also on ledgers as assets).

There was a global breakdown in the science of risk management, I fear. 

Sun, 01/22/2012 - 12:36 | 2086512 Hulk
Hulk's picture

In many of the financial models, that have since broken down and left us where we are now, risk was assumed to be zero...

Sun, 01/22/2012 - 13:17 | 2086569 centerline
centerline's picture

The way I see it is maybe too simplistic...  that is, the basic mathematics of the system imply there is a logical conclusion.  And end.  A point of diminishing returns, like so many other monetary systems throughout history.

Anyhow, as the point of diminshing returns is reached, there appear to be several constants.  The first of course is the shenanigans used to buy a little more time at greater and greater cost.  The social instabilty that arises from such monetary actions.  And what I think is more and more relevant today is the following thought...

That the demand for returns becomes ever greater as a need to service increasing debt.  But, at the same time, ability to obtain said returns gets harder and harder.  Money is "forced" into riskier and riskier places in order to obtain those returns.  This makes the system appear so resillient when in fact it is not.  I wager this a major fact in nations becoming overly imperialistic.  This is what makes the death of money seem too take so long.  

So, in a very longwinded answer - I completely agree that risk management (or lack thereof as a result of necessity) is a real problem.  It is however an effect, not a cause.  But, effects surely become causes in any chain of events.  Idiots down the road will probably look back and blame the mess on poor risk management, then proceed to create another ponzi scheme.

Sun, 01/22/2012 - 16:01 | 2086860 slewie the pi-rat
slewie the pi-rat's picture

i had not 'relaoded' to see your comment here, center, before i posted, but those diminishing returns are extradimensional & getting brutal, too!

most of the certifiables, however, seem to be harnessing the (w)horses to the bandwagon of: "capitalism is too unruly!"  "capitalism is too harsh!" "capitalism is THE PROBLEM!"  "capitalism is in failure!

this is pretty subtle bullshit, imo, and, when propaganandated, will be widely believed.  in other words, the TBTFs and the "crises" are now blamed on "capitalism"~~not political borrowing, not FED bubble-blowing, not on the fact that fascist cronies are not prosecuted, not on bailing out the BK, not on widespread incommpetent, clueless, and gutless leadership, not on non-enforcement of anti-trust laws, not on political nullification of contract law~~but on capitalism. why?  b/c it is just "too tough" on losers, failures, socialists, and communists, who are now, after basically destroying it, gonna "fix" it! Gaaaaaahhhh!!!  they shall now proceed to regualte more effectively...

these same moronic shitheaded asswipes who would simply not allow the capital to clear during the last "crisis" are now gonna blame "capitalism" for the FACT that they refused to let it do its thing and instituted systemic mark2centralPlanningMemo instead! 

if one is holding paper assets and does not know who one's counterpaties are and how solvent they are:  your counterparties are these very moronic shitheaded asswipes and they are so BK and full0'shit, if you look closely, you can actually see it starting to come outa their ears!

Sun, 01/22/2012 - 21:35 | 2087320 knukles
knukles's picture

Outstanding.  Well said.

Sun, 01/22/2012 - 14:02 | 2086636 slewie the pi-rat
slewie the pi-rat's picture

you noticed?   L0L!!!  trumped by the science of pigman greed and criminality?

slewienomics indicates that the amount of time, energy and money put into this centralPlanningTM ponzi charade should be considered as part of the social cost of operating an economic  blackHole aka paper backed by insolvent entitites or denoting "limited liability" ownership of same, or even worse, citizenship under these self-aggrandiZing criminal cretins

i mean, talk about the law of diminishing returns!   but, it's the only law left, here!

i liked the reference++ to carl icahn & had thought of him last week while learning about the hedgies' "blocking strategy" in the "game".  fulcrum securities @ the endGameTable-talk = carlI

also++, the ECB as DIP and their missed optimal strategy of buying all greek debt, back in a year divisible by 5.  however the EU QE capacities may have been undeveloped or under wraps prior to replacing DSK at the IMF b/c he was too much politician, too little technocrat

so it seems the details of how to deal with the EU to keep it functioning may emerge later, if at all, whereas the details of how to deal with the non-functioning aspects already exist and suck rocks.  swell, huh?

since there are so many insolvencies in your unicornholery, best of luck trying to firewall the contagion, you wunnerful NW0, you!

disney needs to re-do fantasia w/ the sorcerer conjuring butterflies w/ fiat wings and his apprentice loosing a flood of fiat liquidity.  instead of his "tool" being the broom, he can be tasked with ordering the sorcerer's debits and credits.  then, when he tries the conjuring, the debits and credits come to life and turn into:  debtors and creditors!  the spectres of BK and counterpaty risk & failure appear!  the eternal theme of trying to bail!  debtors in possession!  finiMinis in clown cars!  and, then the deus ex machina as the sorcerer "wakes up" and re-establishes control.  mickey will hafta play the apprentice again since few have the ears to qualify for the role!

[paste]:  a case of sovereign default will very likely make mark to market unavoidable, thus exposing the proverbial nudity of the emperor

the people walking off w/ all the money, however, are those who "clothe" the emperor so splendidly~~the "tailors and assistants".   they have the sovereign and the subjects enchanted by these "clothes"

mark2market is 'kryptonite' to the insolvent "superheroes"

this is quite akin to baum's "wizard" who operates "behind the curtain", which ain't in "kansas"

so maybe debt will stop loking so sexy compared to fiscal responsibility to a few more people, this week...who knows?

as tyler reminds us, all this paper is "in circulation"

that's reassuring! 

got "hard money"? 

Sun, 01/22/2012 - 15:03 | 2086758 Hulk
Hulk's picture

The fantasia imagery is spot on Slewie...

Sun, 01/22/2012 - 18:56 | 2087115 centerline
centerline's picture

Slewienomics.... an instant classic.  Well done!  LOL.

Sun, 01/22/2012 - 11:01 | 2086366 working class dog
working class dog's picture

what if this happens what if that happens what if, what if what if.....

The middle class private working class people of greece will not take a pay cut, nor will they do it in the US. The sheeple will burn down the banks and govts before they permit shyster back room deals to prevent them from feeding their families.

 

 

Sun, 01/22/2012 - 11:09 | 2086374 Bobbyrib
Bobbyrib's picture

Proof read this thing, in case it gets picked up by the MSM. It is a brilliant peice of work and deserves recognition.

Sun, 01/22/2012 - 11:11 | 2086380 London Banker
London Banker's picture

Many thanks, Tyler, for a fascinating education in the intricacies of the pending Greek default.  I've learned a great deal of useful context.

As others have urged, do not dumb down or shorten your posts to boost their popular appeal.  The value of ZeroHedge is in making insider analysis available to a wider consituency.

Sun, 01/22/2012 - 11:24 | 2086393 EhKnowKneeMass
EhKnowKneeMass's picture

But, but, but, this is a fringe blog, London Banker, which makes shit up from thin air. How can you, of all esteemed individuals, say good things about this blog. A five minute time out for you. And once that's over, wash your mouth with a soap.

Sun, 01/22/2012 - 11:32 | 2086404 CreativeDestructor
CreativeDestructor's picture

Kickestass post seriously!!!
If ECB really is worthless equity holder and parties understand then why Greece doesn't just screw everyone equally. That would surely be better outcome than 2 tired market which will lead to a nightmare.

Sun, 01/22/2012 - 11:40 | 2086411 FranSix
FranSix's picture

The first one out the door starts the financial crisis, but at least they live to see another day. Thus they can rest assured that they have acted accordingly.

A panic should ensue until 'la stabilite' is restored.

In the meantime, there are plenty of beautiful Greek brides looking for a husband.

Sun, 01/22/2012 - 11:47 | 2086422 RiverRoad
RiverRoad's picture

 When the dam breaks water will seek it's own level; when all the shadow boxing, head-faking, hoop jumping and feinting are over.....Mother Nature rules.

Sun, 01/22/2012 - 11:50 | 2086431 goldencrumbs
goldencrumbs's picture

ZH - Thanks for the brain sweat on a Sunday morning. You are greatly appreciated

Sun, 01/22/2012 - 11:52 | 2086435 ejhickey
ejhickey's picture

anyone who contnues to own any government debt after reading this article deserves exactly what they  get>

Sun, 01/22/2012 - 11:52 | 2086436 NoTTD
NoTTD's picture

Excellent analysis.  Fuck these commenters who do not have the patience to read.

Sun, 01/22/2012 - 20:48 | 2086644 slewie the pi-rat
slewie the pi-rat's picture

we may all need trifocals for the upcoming trifurcations!

Sun, 01/22/2012 - 12:24 | 2086442 Money 4 Nothing
Money 4 Nothing's picture

Bull's on Parade.. All this week leading into an Inevitable collapse, My best guess would be around the 2nd - 3rd week of March?

It takes years for a financial crisis to come to a head, but mere minute's for it to end.

Great article, get phizz cause this should bring PM's to the next level.

Enjoy.

http://www.youtube.com/watch?v=-58-36lSqG4

R.I.P. "JoePa" Paterno. PSU. You will be missed.

Sun, 01/22/2012 - 13:36 | 2086602 RiverRoad
RiverRoad's picture

I guess this is what the Ides of March are for.

Sun, 01/22/2012 - 12:00 | 2086449 exartizo
exartizo's picture

Masterful.

Sun, 01/22/2012 - 12:01 | 2086455 Atomizer
Atomizer's picture

 

 

Nice overview Tyler. As of 1/20/12, GGGB1YR:INDwas 390.18 | -69.70| (-15.15%)

http://www.bloomberg.com/apps/quote?ticker=GGGB1YR:IND

This entire charade reminds me of this skit.

How To Irritate People - The Car Salesman

 

Sun, 01/22/2012 - 12:02 | 2086457 markar
markar's picture

what a tangled web global finance is. No wonder the world is FUBAR now that it's all unraveling.

Sun, 01/22/2012 - 12:07 | 2086467 Raymond Reason
Raymond Reason's picture

It wouldn't surprise me if some of the key players in this Greek drama are also reading this article, to understand their own positions better.  Thank you Tylers, for the good work that you do. 

Sun, 01/22/2012 - 13:41 | 2086606 RiverRoad
RiverRoad's picture

If only those guys would send Tyler a check.  Do you realize what research like this ordinarily costs them?!

Sun, 01/22/2012 - 12:12 | 2086478 gojam
gojam's picture

Thank you Tyler.

Very good and clear summary.

Sun, 01/22/2012 - 12:12 | 2086479 GoldmanSux
GoldmanSux's picture

Great piece. Is this the template to be used for each of the larger PIIGS? Seriously? As you go higher up the food chain, all European banks will be nationalized, gobs and gobs of money will need to be printed, and it will still implode by the time you get to Italy. There is no possible successful resolution to this.

Sun, 01/22/2012 - 12:22 | 2086494 graymnzrc
graymnzrc's picture

Why do sovereigns 'need' to have debt anyway?

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