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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 - 12:30 | 2086504 RobotTrader
RobotTrader's picture

Any Eurozone "Shock" will simply drive U.S. Treasuries and German Bunds into Outer Space

 

That would in turn:

1) Crush interest rates across the curve

2) Crush commodity prices and other "risk assets"

3) Allow Uncle Gorilla to float even more debt at near zero cost

4) Entice stock speculators to borrow even more money for free on margin to buy dividend stocks

5) Hysterical headlines on Zero Hedge encourages more people to short stocks

6) Stocks will eventually reach a bottom, U-turn, and then make new highs for the move

 

We have seen this same "Wash, Rinse, Repeat" scenario play out over and over.

What is different this time?

 

Sun, 01/22/2012 - 12:40 | 2086516 Hulk
Hulk's picture

What is different this time?

The Washing Machine is about to break down and there is no money to buy a new one !!!

Sun, 01/22/2012 - 14:10 | 2086657 roy10
roy10's picture

Lst I heard, uncles Ben and Mario can still print. There is no shortage of paper money in the world. You can buy 1,000 washing machines.

Sun, 01/22/2012 - 14:26 | 2086683 RiverRoad
RiverRoad's picture

To launder all those 'million dollar' bills in.

Sun, 01/22/2012 - 13:03 | 2086544 Dr. Gonzo
Dr. Gonzo's picture

22 years ago the Nikkei was at 40,000. Now it's in the 8,000 range after several big dead cat bounces. Why isn't the Nikkei at 1/2 million by now Robot? Uncle Gorilla needs interest rates at zero forever and that's no secret. Problem is soon enough he will be the only one buying his bonds and this will cause commodities to rise to the moon. This post isn't helpful or provocative to me but keep trying.

Sun, 01/22/2012 - 13:31 | 2086586 centerline
centerline's picture

It certainly is possible.   But, I can't help but put reasonable odds on a "lights-out" event that will blow market investments into some other dimension never to be seen again.

The real problem here is getting to root of intent.  It this trading?  Investing?  Your particular strategy to ride the coming storm?  A claim that no storm is coming?

I enjoy your posts from a sense of "poking the bees nest."  Always funny.

But, unless you want to really state your intent/position, you are no doing no better than Zerhedge in encouraging people to go long stocks.  Item #5 really made you sound like a dickhead today.

Sun, 01/22/2012 - 13:47 | 2086612 lizzy36
lizzy36's picture

At some point you realize the washing machine breaks before one can hit repeat.

Then one has to go out and get a whole new machine.

The machine can be tinkered with for some years, replace a part, hit it, tweak it, talk nice about it, but eventually when one least expects it, it just stops.

Sun, 01/22/2012 - 12:48 | 2086528 Mr Sir
Mr Sir's picture

So after 10 trips to Athens Michele Caruso-Cabrera of CNBS has yet to report on the real story out of Greece the last year and that is the following: Last year Greece's tax revenues before tax refunds fell by 3.9% vs. 2010 to 54 billion euros. All of those tax increases and property tax levies and VAT increases essentially achieved only a 3.9% decline in tax revenues. Once again the socialists got the formula wrong: Increases in Taxes does not always equal increases in tax revenues. The GDP of Greece fell by 5.5%.

Total interest expense of Greece in 2011 rose 23.6% to 16 billion euros up from 13 billion euros in 2010. Greece's total debt balance has now risen from 328 billion euros in 2010 to 360 billion euros today.

And now here is the wonderful kicker, primary expenditures fell a grand total of 700 million euros in 2011 to 51 billion euros vs. 2010. So there you have it, the austerity plans of Greece led to not even a 1 billion euros decline in primary expenditures. A complete joke.

The total deficit of Greece rose by 2 billion euros to 27 billion euros in 2011 from 25 billion euros in 2010. I know the Greeks, they will not change as long as they get troika money to not do so. So after 2 years of crisis it is back to Square minus 1 for Greece as Tyler says. Hilarious Budget Report out of Greece can be found here. Enjoy! http://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/a7/22/58/a72258c6ca918ddd7e123b2fe358ecce4b99ad37/application/pdf/Bulletin_12_Preliminary_ENG_12-01-2012_NEW.pdf

Sun, 01/22/2012 - 12:56 | 2086536 RobotTrader
RobotTrader's picture

Anyone remember when the Russian and Argentina stock markets completely tanked in 1998 and 2002?

 

Those markets staged one of the most fantastic comebacks ever seen.

See for yourself:

http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosetti...

http://chart.finance.yahoo.com/z?s=%5eMERV&t=my&q=b&l=on&z=l&a=v&p=s&lan...

The PIIGS will be no different.  Problems will get worked out, things will end up being for the better, and those markets will score fantastic gains in the next 5 years.

Sun, 01/22/2012 - 13:14 | 2086564 Dr. Gonzo
Dr. Gonzo's picture

What level was the Nikkei at in 1990? Did it break the 40,00 level? I can't remember. I think it's around 8,500 today after several dead cat bounces. When do you think the Nikkei will break it's all time high Robot? Will it happen in the 22nd century or the 23rd century? Also didn't the currencies and governments essentially collapse in Russia and Argentina so basicaly if you were a citizen in that country you were probably ruined? What lessons do you think American citizens should take from Argentina, Japan, and the former Soviet Union? 

Sun, 01/22/2012 - 14:52 | 2086733 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

I think Nikkei's high was about 38,900.

Mon, 01/23/2012 - 04:34 | 2088026 chindit13
chindit13's picture

38,915.87

For some peculiar reason I never seem to be able to forget that number.  Put options on that day traded with about 13% vol, and a short time later traded at 75% plus vol, IIRC.  Some ended up yielding a 100,000% return as the market tumbled.  Trade of a lifetime.

Sun, 01/22/2012 - 13:22 | 2086568 AC_Doctor
AC_Doctor's picture

RoboRoach, back to your dark crevice in your windowless world before you add more inverted red arrows to your gigantuan collection!

http://www.picgifs.com/graphics/c/cockroaches/graphics-cockroaches-867774.gif

 Awesome article Tylers!  It is about time the media did real analysis of problems and not just spew out oversold bullshit adages.

AC

Sun, 01/22/2012 - 13:50 | 2086617 RiverRoad
RiverRoad's picture

Before the Phoenix rises from the ashes the earth is scorched......not pleasant to contemplate.

Sun, 01/22/2012 - 14:09 | 2086649 roy10
roy10's picture

If they actually do what Russia and Argentina did and truly clean house/start over, they would recover pretty quickly. If they continue to pretend that everything is fine (like Italy, Spain and Portugal) or take insufficient/wrong steps (Greece), they will take far longer to recover.

Sun, 01/22/2012 - 14:38 | 2086699 Atomizer
Atomizer's picture

 

I'm tough as dirt, I'm mean as blood
Where, where I blow out comes spiders, where I step a weed dies
No smokes with diapers for Pete, King of All Detectives
Fall down on your knees, fall down and worship King Dick
King Dick!
http://www.youtube.com/watch?v=cEHkjFpRH3w

Yawns.. Let the games begin Robotard!

Sun, 01/22/2012 - 13:00 | 2086539 ramzijr
ramzijr's picture

What a great article . Opened my Eyes . 

Keep them coming . 

Thanks ...

Sun, 01/22/2012 - 13:10 | 2086554 nah
nah's picture

write this down

.

write it all down

Sun, 01/22/2012 - 13:11 | 2086556 Stax Edwards
Stax Edwards's picture

I for one am humbled to be in the company of such genius.  TD('s), thank you for the education over the years.  The price is right too.  You are a truly a king among men.

Sun, 01/22/2012 - 13:13 | 2086561 _underscore
_underscore's picture

Very good walk-through Tyler - thank-you. Very understandable & one very glaring consequence, in my opinion: as sovereign bonds are now (or will be very soon) an unquantifiable risk, collateral will in future be required to sell them & an independent 3rd party will hold those assets or title to them. When international debts were settled in gold being moved around on pallets between 'country bays' in Fort Knox, I envisage similar being done when a country sells bonds - maybe Bejing this time around though, instead of FK. The title to assets can be shuffled around equally as easily too. What this implies for world government or governance, you decide.

 

 

Sun, 01/22/2012 - 13:25 | 2086577 AC_Doctor
AC_Doctor's picture

I'm sure the IIF's international phone negotiations are going really SWELL right now, LOL!  NOT!!!

Sun, 01/22/2012 - 13:26 | 2086580 NorthPole
NorthPole's picture

I've got some modest savings 50% of which I'd like to keep in PMs. Seriously: how do I do it?

Do I buy gold coins and keep them in a bank deposit box? Do I buy gold coins and bury them in my back yard? I do buy gold/silver bars ( from who? )

So: buy silver or gold? Where to keep it? Where to buy it? What to look for when buying?

I am just totally green when it comes to PMs. Any recommended reading, perhaps?

Sun, 01/22/2012 - 13:33 | 2086588 AC_Doctor
AC_Doctor's picture

NorthPole,

IMHO:  Buy gold and silver coins and keep them away from the banks safety deposit boxes.  Ever hear of bank holidays and confiscation?  Get a huge safe and bolt it to a concrete floor or wall, bury in plastic tubes, stash around your house but whatever you do keep your yap shut about it!  Gainsville, Tulving, AMPEX are all respectable dealers in the USA.  Turd's Blog, SilverDoctors, ZeroHedge, SGT.Report, King World News all have excellent articles and info pertaining to precious metals.  ALWAYS TAKE PHYSICAL DELIVERY OF ALL YOUR PM ASSETS.  No, you cannot eat them, but they are a store for wealth and have been real money for over 5000 years.

Sun, 01/22/2012 - 15:44 | 2086833 Jena
Jena's picture

NorthPole,

First, keep reading ZH.  The information you'll get here on precious metals and everything else is priceless, both in the articles and in the commentary.  You may need to do a lot of Googling and other research to understand it but it'll get easier as time goes on.  You'll find other sites that you may want to explore as well.

Second, everything that AC_Doctor said.

Third, some very helpful and enterprising ZH participant put together a Web site that tracks various reliable precious metal dealers for both gold and silver prices.  You can see via the chart who's got the best price on what.  It's updated constantly in real time.

http://comparegoldprices.com/  and  http://comparesilverprices.com/

Good luck and happy stacking.

Sun, 01/22/2012 - 16:18 | 2086893 847328_3527
847328_3527's picture

cool.

My cousin just bought some of those 2012 Dragon gold and silver coins...they are beautiful.

Sun, 01/22/2012 - 13:40 | 2086595 RobotTrader
RobotTrader's picture

Buy a nice gold Rolex watch from a licensed retailer.

 

1)  Nobody is going to 1099 you when you sell it

2)  No confiscatory "ordinary income" tax gains on the sale, either

3)  You can wear it and enjoy it

4)  You don't have to worry about unscrupulous dealers or safe deposit boxes

5)  Uncle Thug won't confiscate it when they outlaw the ownership of gold bullion or make it illegal currency

6)  You won't make a fool out of yourself by F12-punching the Kitco site or reading outlandish predictions on King World News like the tin foil hat crowd.

7)  You can live your life with a positive outlook and not be suckered in by General Jim or Jim "T-Shirt" Willie about how the the system is going to crash "Any Minute Now, I Swear!!!"

Sun, 01/22/2012 - 13:59 | 2086624 Infinite QE
Infinite QE's picture

Lets put some truth to the Robot Pump-N-Dump scamo of the day:

1. What dealer gives out 1099? None that I have seen.

2. LOL.

3. Wear your gold Rolex in Robot's hood and the homies will knive you to get it. Very safe! LOL!

4. LOL.

5. LOL. Most smart people have diversified their gold holdings out of the USA, but this is something beyond Robot's limited intellect

6. This is what Robot did until his guru told him to panic-sell his gold at 1200.

7. LOL. This from the 50+ year loser who still plays in the dirt on a bicycle and calls this living a life.

 

Sun, 01/22/2012 - 14:05 | 2086642 roy10
roy10's picture

I find it hilarious that people believe Gold has some real underlying value. If the baking system collapses, do you think your gold (buried in your back-yard) would have any value?

If you’re worried about the apocalypse, gold is the last thing you should buy. Get real assets, such as real-estate, food or anything else that has a fundamental value.

P.S - If they confiscate gold in the US, do you think your offshore holding would be immune? If the US falls, the entire global system falls and any offshore assets you have will be long gone.

Sun, 01/22/2012 - 14:09 | 2086651 Infinite QE
Infinite QE's picture

Sure. Balance is always needed in a portfolio. Gold certainly seems to be providing a value to those living in Greece,as their banking system has imploded, and in other parts of Euroland these days. I am planning for long-term decay, not collapse. 

Sun, 01/22/2012 - 14:14 | 2086662 roy10
roy10's picture

Sorry, I'm not a believer in any asset than has no real underlying value. Gold has no underlying value or “real” demand and its price is determined solely on the greater fool theory. Real-estate and commodities with real underlying demand are a far better hedge for the scenario you are describing.

Sun, 01/22/2012 - 14:16 | 2086666 Infinite QE
Infinite QE's picture

Sorry. You need to go study some history. 

Sun, 01/22/2012 - 14:30 | 2086681 AC_Doctor
AC_Doctor's picture

Roy, don't perform the sin of being a careless sloth.  Do some diligent research on precious metals and lose the freaking paper bag buddy. 

So what are you going to store your wealth in when the current banking system collapses, Beany Babies and Pop Rocks?

Sun, 01/22/2012 - 14:43 | 2086710 roy10
roy10's picture

It’s a difficult question. I’m not sure such an asset exists and IMO, it’s definitely not gold. The only thing that comes to mind is real-estate and physical machinary.

Sun, 01/22/2012 - 14:48 | 2086722 Infinite QE
Infinite QE's picture

The risk on real estate is confiscation via taxes and then the great unknown of what happens when the counties implode and go into default on their bonds. Do the JPM's/GS's then start trolling around and confiscating directly the assets in these counties? Farmland with water rights is a knee-jerk reaction that will probably do well, unless fascism really takes hold and confiscation begins in earnest. Gold is not perfect, but it is much more portable than a farm. 

Sun, 01/22/2012 - 14:55 | 2086738 roy10
roy10's picture

Too many unknows to make an informed decision. I still have a fundumental problem with Gold - it has no practical use, but like I said - it's too difficult to predict.

Sun, 01/22/2012 - 15:09 | 2086775 Infinite QE
Infinite QE's picture

So much of this stuff is hard to predict. All one can do is study a bit of history, read the current landscape and then trust one's intuition. There are no crystal balls, even though some like to believe there are.

Sun, 01/22/2012 - 15:02 | 2086754 NorthPole
NorthPole's picture

The problem with real estate is, it is currently vastly overpriced and the establisment won't let the price go down. When real estate finally goes down , so will my fiat. So no, IMHO real estate won't help me store my value.

Machinery? Like, buy a lawn mover, store it in my garage hoping its price will rise? Hmm.

Food? Let's get real. There's no way I will fill up the whole garage with canned food here. My wife would call for a divorce.

But you do have a point. While I am a believer in gold - I have to admit I'd rather own something like oil. Problem with oil though is the same like with food.

Sun, 01/22/2012 - 16:24 | 2086905 roy10
roy10's picture

When I say machinery, I mean anything that can produce something of real value (a lawn mower wasn’t what came to mind).

Again, I don’t have easy answers.

Sun, 01/22/2012 - 14:41 | 2086703 roy10
roy10's picture

We haven't seen an equivalent of this in history. We've never seen printing on this scale in a country that virtually represents the entire world financial system and in the second block in parallel. We’re going into uncharted territory.

Sun, 01/22/2012 - 14:44 | 2086713 Infinite QE
Infinite QE's picture

And what happens when their is a global reflation via infinite bond purchases/money printing/currency swaps? Is it inflation, and then what role has gold played during inflations?

Sun, 01/22/2012 - 14:53 | 2086734 roy10
roy10's picture

I agree that as long as the current rules work, Gold is a good inlfation hedge. My thinking is that when we're talking about a system collapse (or decay), the rules may change.

There are no easy answers here.

Sun, 01/22/2012 - 15:00 | 2086743 Infinite QE
Infinite QE's picture

If we descend into a Mad Max type of situation, then lead may be more valuable than gold in the interim. Maybe even toilet paper. I think the PTB that own the world CB's know the risk of losing control of the world's richest franchise, central banks, and will do all the shenanigans necessary to inflate their way out of this. The real risk to them is the rise in consciousness that is occuring. Perhaps this is the real reason for the recent introduction of fascist-level laws in America. For now, its inflate or die.

Sun, 01/22/2012 - 15:30 | 2086809 jimmyjames
jimmyjames's picture

And what happens when their is a global reflation via infinite bond purchases/money printing/currency swaps? Is it inflation, and then what role has gold played during inflations?

*********

Gold is not an inflation hedge-gold is a credit default risk hedge-

We had inflation from 1980 to 2001 and gold did nothing-

You need to figure out why in 2001 that gold seen something abnormal and so did the long bond and that something was credit default risk-

Has that situation subsided or gotten worse?

There will be no inflation-at least not into the broad economy-

Printing money and stuffing it into banks who hold onto it-is not inflationary-

Do you think with high unemployment and falling wages-they will just mail checks to us?

Sun, 01/22/2012 - 14:50 | 2086729 jimmyjames
jimmyjames's picture

We haven't seen an equivalent of this in history. We've never seen printing on this scale in a country that virtually represents the entire world financial system and in the second block in parallel. We’re going into uncharted territory.

**********

Relax-we've been here before-

Roosevelt increased the money supply (printed) 100% above base in one night in 1933-


Sun, 01/22/2012 - 14:33 | 2086691 jimmyjames
jimmyjames's picture

Real-estate and commodities with real underlying demand are a far better hedge for the scenario you are describing.

************

Real-estate-the most highly visible asset to have when the taxman/government comes looking-

Sun, 01/22/2012 - 20:32 | 2087246 Dr. Gonzo
Dr. Gonzo's picture

Jewelry and decoration consumes quite a bit. A paper dollar bill is the thing that is totaly useless when the governments that force the people to use them go tits up but I guess you'ld rather have 17 pieces of paper that say $100 than an gold maple in your pocket during a Weimar situation. Please understand that man is always looking for sources of value and stability so he and his family can survive from the likes of banker/politician types that are constantly trying to cheat, steal from him and gold/silver is the best at doing this. I've made the most from gold silver and or mining stocks than I have from anything other type of investment... great money too so I guess I'm an exception to your greater fool theory. 

Sun, 01/22/2012 - 14:28 | 2086680 jimmyjames
jimmyjames's picture

I find it hilarious that people believe Gold has some real underlying value. If the baking system collapses, do you think your gold (buried in your back-yard) would have any value?

*************

The banking system has collapsed-quite some time ago-

Central bankers seem to be accumulating gold at a quickening pace in the last few years and the tempo seems to be building-last time i looked-

Sun, 01/22/2012 - 15:11 | 2086771 Hulk
Hulk's picture

A) If the baking system breaks,,, I'll get a new Easy Bake oven

B)  Get real assets, such as real-estate, food or anything else that has a fundamental value.

      Interesting how the red trolls always assume we are sitting on a golden chair, buck naked...

Sun, 01/22/2012 - 14:08 | 2086650 CaptainObvious
CaptainObvious's picture

Buy both, buy them at a coin dealer and pay cash, keep them at home where you have easy access to them.  Don't trust the banks with your PMs.  Remember Executive Order 6102 in which private gold ownership was outlawed and gold was confiscated.  Coin collectors were exempt so call yourself a coin collector.  Besides, coins are easier to conceal than bullion.

Sun, 01/22/2012 - 15:21 | 2086779 NorthPole
NorthPole's picture

Thanks for all the answers, also to roy10.

One more Q: I would have bought gold already if not for one problem: currently I work overseas and most of my fiat is in a local bank. When I come back to my country, I'd have to repatriate the assets. With fiat I can simply send it in chunks < 5000 euro and AFAIK that shouldn't ring any bells. But with gold? Say I've got $100000 worth of gold here, how do I move it thru borders?

Sun, 01/22/2012 - 16:50 | 2086947 slewie the pi-rat
slewie the pi-rat's picture

you can stop now.  you've hijacked this string (w/ roy10) for 2 hours...

you have a problem:  your problem isn't what you own or whether you have food stored, but that you can not think clearly.  neither can roy10, but he is pure troll, and you may not be

this whole fabulous piece by tyler, which you probably didn't even read, certainly could not comprehend, any more than roy10 could the last time tyler put the precurser to this essay up and addressed him directly about wtf he was saying, here, (as did i)~~this whole piece shows the clustefuk of swannery which emerges when people don't use common sense in their personal and collective affairs

my advice to you:  keep it simple and take responsibility for yourself.  this will threaten your wife, of course, but why don't we just let her try to deal w/ that, ok? 

these are trying times, and as we go thru them, together, each of us is almost completely powerless over anything except "myself" and many abdicate there, also

but you (like roy10) just keep generating questions and nuances, but if these are your questions, maybe you can't undertand the answers, especially since you are in your 10th week of posting here

hopefully, you are just drunk or something!

Sun, 01/22/2012 - 13:56 | 2086622 Richard Whitney
Richard Whitney's picture

Tyler...Thanks for an excellent exposition of the ongoing fiasco. With economy, you composed an essay that explained this issue and the legal issues that face the participants. It was a joy to read.

 

Sun, 01/22/2012 - 14:00 | 2086629 TooRichtoCare
TooRichtoCare's picture

And yet, somehow people still think that ZeroHedge is penned by a solo financially-savvy guy called Tyler Durden.

From this post, and many others, I think it's becoming quite clear that you must have a staff of around 200 people!

Very high quality stuff. If you ever choose to ditch the ads, and the donation box, and go for a subscription model, I'll be one of the first to hand over my credit card details.

Fri, 01/27/2012 - 08:15 | 2101998 Archduke
Archduke's picture

from the time-zones alone I'm guessing they've got global coverage.

probably a handful staff writers in europe, same in asia, and a host

of regular contributors / stakeholders.  I say stakeholders because

it's likely they trade on their beliefs.  kudos to them for keeping the

info open, free and honest (in the sense that I don't think there is any

active mis-info to spike a trade -they hold a consistent viewpoint).

Sun, 01/22/2012 - 14:06 | 2086643 ReallySparky
ReallySparky's picture

Thank you Tyler for the essay and the education that you provide everyday. I have been following this bunch of Tyler's since the blogspot days. I am grateful for the awakening.
After reading this essay I can not help but think, when will humanity wake up and free themselves from this crazy slavery. Seriously, all of Europe is going to follow and abide by case law established in Peru, Yemen and Nicaragua? These counrty's are small with really no international pull, significant populations, or necessary assets.
So in effect the politicians in control now take the easy road of default fully knowing that 6-10 years down the road some court will enslave their population, (a population that does not know why they owe), with some stupid legal judgement that effectively holds them hostage to the point that the country can not trade anything. Of course they will be retired at that point. Just like those politicians before them that allowed this trap to be set.
When will the people of the world wake up and no longer agree to enslave themselves and their unborn prodigy for the benefit of one hit wonder hedge funds and central planners.
Honestly, do men go to school/work, and say to themselves, "I want to be part of a group that buys/legally steals national treasures; that collects funds ahead of another humans needs; holds entire nations hostage so that I can personnaly prosper"?
Why does humanity not question how ridiculous this status quo is? When will people start banding together locally to produce, share their needs in some type of fair capitalistic system that values personal accountability and liberty?
Why does man insist on letting these hoodlem's steal their labor, value and treasure?
Why do I still conform to this ludicrous system of taxation and slavery?

Sun, 01/22/2012 - 14:07 | 2086646 icm63
Sun, 01/22/2012 - 14:09 | 2086648 Judge Arrow
Judge Arrow's picture

The impending Greek lawyering is shaping up as an excellent venue for the 6 million lawyers in the country, most of who seem to be practicing in my courtroom to get the hell out of here and go there - bailiff, bar the door, drinks all around. Except to the lawyers. Go To Greece!

Sun, 01/22/2012 - 14:10 | 2086655 darkpool2
darkpool2's picture

What do i do when the lawyers and regulations get too close? Pick up my toys and put them somewhere else. Easier to play in another sandbox than fight over the current one.
Just a thought re the relative attractiveness of the DM 's v some of the EM 's

Sun, 01/22/2012 - 14:23 | 2086677 monopoly
monopoly's picture

I hardly know anyone in my circle of friends or those of professional status that even remember where Greece is located, much less understand the ramifications of this article. Just the fact that most are here put you in a different universe than the mainstream. Few can grasp the enormity of the situation and the consequences that will occur sooner or later. Even if some do not understand all that is posted, and I am one of those, we have an edge, a modicum of intelligence to at least grasp what is occurring on our planet. And we do not have easy answers. It is my belief that this will just keep rolling along until it stops. And it will not stop until the printing press is taken away from the head inmate.

There is an important election coming up. There is a lot of "Roman" power behind the players to ensure that the cart is not turned upside down until the second week of November, 2012. There will be much talk of a better economy and a better outlook. As long as no one attempts to talk about our debt and make the sheeples understand exactly what will happen, the waters may stay calm for a few more months.

But make no mistake about it. We will pay for the greed and destruction that our wealthy bankers and their cohorts showered us with. We all know that never has a funding crisis been solved with more debt. And with 70% of this broken economy dependent on us, with under water mortgage's, credit card debt at 21% interest, and job prospects that continue to deteriorate, no matter if you are making $160,0000.00 or $16,000.00 where is the growth going to come from? Govt. is retrenching, Exports, that is a joke, not much left except us. Greece will start the games. But it will be one where many Gladiators fall before the Empire is brought down. And have no doubt, it will reach our shores.

Just be thankful you have this site, no matter if you agree or not. At least here there is freedom to express, disagree, get pissed off or be thankful. How many places do we have left that allow that?

How about a little football this afternoon to unwind. :)

Sun, 01/22/2012 - 14:51 | 2086730 dondonsurvelo
dondonsurvelo's picture

A must read article.  Mahalo.

I first started reading Tyler through SA and then directly through the ZH website.  Since that time, I have acquired knowledge that could not have been acquired elsewhere for free.  This article was in my view put into layman's terms and is easily understood if time is taken to read it properly.  I thank all at ZH for the education.

Sun, 01/22/2012 - 14:54 | 2086735 _underscore
_underscore's picture

I, probably like many here, don't envisage (or expect to live through!) a total fin-de-siecle / social disintegration type calamity - so for all those who say 'what good does gold do in that situation..etc.' - I agree. Real estate, concrete bunker, endless canned food, weapons etc., good idea but - how can most of us consider or manifest that (or would even really desire it..) ? We can't really, or practicably. Quite frankly, I'd be happy to die (painlessly!) in that type of scenario.

 However, I can envisage a degrading social, political & financial world; but, there are huge armed forces & police forces all around the world, so disintegration of 1st line 'law & order' is a long way off, in my view.

In that scenario a universal currency/money type will be useful & all my instincts tell me we're being set-up & misinformed. Those in the know / 1%'ers etc., will have been drawing their wealth preservation plans, like the gold accumulating CBs & like canny China. If my instincts & information processing abilities turn out to be wrong - that's great too. It means, (..and this works like Pascal's Wager), we'll be living in a world that didn't pop & opportunities will abound & my gold hedge will be worth a bit less (but probably not less than cost of extraction) - I can live with that too!

Sun, 01/22/2012 - 15:14 | 2086782 pain_and_soros
pain_and_soros's picture

Simply stated, a masterpiece.

What I found most interesting is the claim that european central banks including the bundesbank are not covered by sovereign immunity and thus could be exposed to litigation risk in the case of a greek default.

That presumably exposes ECB & bundesbank assets, specifically their gold bullion, if they decided not to print euros to pay off any claims by successful litigants...

Anyone still believe the ECB won`t print?

 

Sun, 01/22/2012 - 15:25 | 2086796 Greg
Greg's picture

Greece just needs to pull the rip cord on this whole mess, and get it over with already.  It feels like a bandaid being ever so slowly being pulled off.

Sun, 01/22/2012 - 15:26 | 2086800 falga
falga's picture

So we have now the hedge funds in the corner holding out for a better payback/deal, the ECB amassing a position to insure it controls the eventual deal structure in order to avoid a CDS event and the Greeks who are threatening to blow the sovereign bond market in case they don't get more cash to pay salaries!

What a circus....

Great article!!

Sun, 01/22/2012 - 15:27 | 2086803 TheArmageddonTrader
TheArmageddonTrader's picture

Very good piece.

I think it's pretty clear that Greece will retroactively put CAC clauses into its domestic-law bonds. The troika has given Greece a debt-reduction minimum that can't be met without forcing all the domestic law bonds into the restructuring. Since it's really Germany behind this move and legitimizing it, this will of course degrade all domestic-law bonds all over Europe. This also means CDS will be triggered.

As for the foreign-law bonds, my guess is the hold-outs will be told to go fish, a la Argentina. That is, they can accept the restructuring, or they can get nothing and try their luck in court. (So ironic that it was the Italian government leading the indignant crusade against Argentina back in the day.) Eventually some of them might get paid for nuisance value, but I don't think Greece has a hush money budget at this point.

 

Sun, 01/22/2012 - 15:32 | 2086811 Peter Pan
Peter Pan's picture

I am not a conspiracy theorist as such but I have always left open the possibility that the really big money of this world has some sort of contingency plan for either planned or unplanned chaos scenarios.

Assuming this to be the case, could this be the dawn of some form of world "government"?

Or, could this be the opening chapter heralding the return of the middle ages and barter?

Or will a big bang simply allow all paper to destroyed so as to allow for a return to a free market that is manipulated far less by bankers, fiat and fractional banking? In other words short term chaos which nevertheless allows for a reset?

Sun, 01/22/2012 - 16:29 | 2086911 roy10
roy10's picture

Big money would be the biggest loser of such a scenario. So no, they have plan.

Sun, 01/22/2012 - 15:37 | 2086816 lemosbrasil
lemosbrasil's picture

Congratulations 1000 times by the article !! its a fantastic point of view !

Sun, 01/22/2012 - 15:38 | 2086817 Zenster
Zenster's picture

Amazing post, I printed it off so I can reread easily in the next few weeks, hopefully I'll understand more of it each time I go through it.

 

Cheers for taking the time to write it.

Sun, 01/22/2012 - 15:45 | 2086838 trentusa
trentusa's picture

Wow that's some good writin'. I'm only halfway thru but nobody does it better than ZH. Goldman or JP would never dare give their customers so concise an explanation of what the hell this Greek restructuring is to the people in the trenches (of the tranches- pardon pun).

        ZH puts the NYT Bloomburg and now Reuters to shame again like always, adding to the list of big-time players this website is pissing off. I'm lovin' it.

      Now I'm going to go back finish reading the article, to see Tyler finish doing it backwards and sideways in satisfying manner that requires a post-read cigarette.

      This is what free speech is supposed to look like in an uncensored free market, and there isn't another alternative website in the english language that can break it down like ZeroHedge.

Sun, 01/22/2012 - 16:02 | 2086863 847328_3527
847328_3527's picture

"the conquered have no rights"


 

Vae victis … "Woe to the vanquished (ones)" or also "Woe to the conquered (ones)".

In 390 BC, an army of Gauls led by Brennus attacked Rome, capturing all of the city except for the Capitoline Hill, which was successfully held against them. Brennus besieged the hill, and finally the Romans asked to ransom their city. Brennus demanded 1,000 pounds (327 kg) of gold, and the Romans agreed to his terms.

Livy, in Ab Urbe Condita (Book 5 Sections 34–49),records that the Gauls provided steelyard balances and weights, and the Romans brought out their gold. But the Romans noticed that the weights were fixed, and the tribunes dared to complain to Brennus about the issue. Brennus took his sword, threw it on to the weights, and exclaimed: "Vae victis!", for the conquered have no rights, forcing the Romans to bring even more gold to fulfill their obligation.

https://secure.wikimedia.org/wikipedia/en/wiki/Vae_victis

Sun, 01/22/2012 - 16:17 | 2086890 tom a taxpayer
tom a taxpayer's picture

Jump!

Sun, 01/22/2012 - 16:28 | 2086910 Meremortal
Meremortal's picture

Some of these Tylers are much better than others.

My compliments to this Tyler.

Sun, 01/22/2012 - 21:05 | 2087280 Goldilocks
Goldilocks's picture

Hmmm,  :-/
the other Tylers are awesome too.

Sun, 01/22/2012 - 16:31 | 2086916 JamesBond
JamesBond's picture

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”

====

that's a joke, right?

Sun, 01/22/2012 - 16:33 | 2086919 Imminent Collapse
Imminent Collapse's picture

Tyler, my applause for this excellent article. I now get it. My only concern for investing in these hedge funds is the complicated twists needed for recovery. I like straighter shots for the kill. Every twist and turn presents an opportunity to miss the turn. Add to that the huge risk in the market to the whole system which could change the patterns on which this theory of collection is based. When you mess with the big boys you may get more than you bargained for. High risk investing. But big returns if you can pull it off.

Sun, 01/22/2012 - 16:59 | 2086959 Georgesblog
Georgesblog's picture

The faith to believe a lie is powerful delusion. Faith in things that will be destroyed is self-destructive. Every train wreck eventually comes to a halt.

http://georgesblogforum.wordpress.com/?s=The+Daily+Climb


Sun, 01/22/2012 - 17:09 | 2086974 Cpl Hicks
Cpl Hicks's picture

I'm part way thru and have a technical question.

From 'Singh on Orphan bonds'...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.

Why do the bonds with the longest maturity have the smallest remaining percentage outstanding value? I would expect the 2031's to have the greatest outstanding remaining percentage.

Sun, 01/22/2012 - 17:10 | 2086976 Howdan
Howdan's picture

Thank you Tyler once again for providing a fascinating and well-explained "Guide" to the Greece Bond Fiasco.

ZeroHedge is now (well, it has been for some time) my primary financial news source as it is so informative, detailed, funny and TRUE!

I very much value the technical and professional insight provided by Tyler and the fellow ZH contributors. As a mere home-based "day-trader" I don't know what I'd ever do without ZeroHedge.

Lastly - as for Greece I say "Let 'em D.fault" and let this whole messy bloomin' saga end once and for all.

Sun, 01/22/2012 - 17:12 | 2086977 Howdan
Howdan's picture

Thank you Tyler once again for providing a fascinating and well-explained "Guide" to the Greece Bond Fiasco.

ZeroHedge is now (well, it has been for some time) my primary financial news source as it is so informative, detailed, funny and TRUE!

I very much value the technical and professional insight provided by Tyler and the fellow ZH contributors. As a mere home-based "day-trader" I don't know what I'd ever do without ZeroHedge.

Lastly - as for Greece I say "Let 'em D.fault" and let this whole messy bloomin' saga end once and for all.

Sun, 01/22/2012 - 17:30 | 2087012 RiverRoad
RiverRoad's picture

Re a Greek default:

  Good luck with the hedge funds'  exposing the Bundesbank to litigation risk.  When the blowback (Plan Z) from these sovereigns ultimately comes, the hedge funds may be surprised to discover that they have a whale by the tail and his name is Moby Dick.  They'll make Corzine look positively brilliant for front-running the whole thing and getting out ahead of the game.  And re literary allusions, the Tale of Little Black Sambo comes to mind here too.

Sun, 01/22/2012 - 18:13 | 2087062 Peter Pan
Peter Pan's picture

One thing is for sure. Legalities and technicalities in the hands of bankers and manipulators seem to be on the verge of once again overriding the practicalities of a living and breathing economy no matter which continent it's in.

Tyler, your are not providing just a service. You are fulfilling the free market's greatest need, which is timely and high quality information and analysis.

I am amazed the big boys have not either bought you out or taken you out.

Sun, 01/22/2012 - 18:21 | 2087075 ebworthen
ebworthen's picture

Awesome, only had until now to read the whole thing.

The more I learn the more the simple truth of the statement "You can't solve a debt crisis with more debt" becomes crystal clear.

A real shame, amongst our other shames, that this will all eventually be put on the backs of individuals and families who had no control over the insanity (beyond rioting and risking their life and limb).

Sun, 01/22/2012 - 18:21 | 2087076 newengland
newengland's picture

Tyler,

Thank you for this mind-blowing expose. Brilliant work, and top notch Fight Club.

Hello ZHers. I've been reading this site for about a year, and enjoy your comments. 

Long gold and silver phyzzzzzz ;-D, although boating accidents are always a risk, of course...

 

Sun, 01/22/2012 - 18:27 | 2087085 flyonmywall
flyonmywall's picture

At some point, some entity will have a bond payment due, and they won't be able to make that bond payment. Just like what happened to MF Global.

It doesn't matter what entity it will be. It could be Greece, Portugal, Italy, some Italian bank you've never heard of, or some Dutch clearing house you've never heard of.

Somewhere, at some time in the near future, somebody is going to fuck up BIG TIME.

The problem with telling LIES, is that the LIES get bigger all the time, and you have to keep telling BIGGER LIES to explain the LIES you told previously, and so on. At some point, the people will not believe the LIES, and all the can kicking and window dressing in the world will do you no good.

I think these "Marios" will eventually be overwhelmed by their own set of LIES, because they will tell so many lies, they won't be able to know what the real truth is.

Hope you got your things together for that moment. Cuz it's gonna be BIG !

 

Sun, 01/22/2012 - 21:08 | 2087282 Goldilocks
Goldilocks's picture

From the movie, The International
http://www.imdb.com/title/tt0963178/quotes

Cassian Skarssen: When there's no way out, you find a deeper way in.

Sun, 01/22/2012 - 18:30 | 2087087 AC_Doctor
AC_Doctor's picture

Tic toc, isn't it like past Midnight in Athens?  Are these jerkoffs still on the phones negotiating?  I bet not, midnight is for hookers and blow!  Kaboom bitches!!!

Sun, 01/22/2012 - 18:57 | 2087123 michaelsmith_9
michaelsmith_9's picture

The markets are bound to break of the current holding pattern.  We remain at a critical inflection point, but a bullish case can certainly be made as we are leaning more and more to as price action fails to break down.  A new Market Report has been posted with a look at the SPX, TNX, HG, CL, AUDUSD, and AAPL.  http://bit.ly/zrT8yb

Sun, 01/22/2012 - 19:09 | 2087136 tongue.stan
tongue.stan's picture

So the fate of the world is in the hands of hedge funds, the greediest bunch of bastards ever hatched, withut conscience or empathy toward humanity. They will holdout, they will sue, they will bend ober alles who stand in their way, they will destroy everything good and right in the world. Psycopaths allways do the same things. Very pridictable.

 

We. Are, Fucked.

Sun, 01/22/2012 - 20:13 | 2087223 delacroix
delacroix's picture

In the heart of evil, is self hatred, so yeah, we might be fucked.

Sun, 01/22/2012 - 19:48 | 2087188 WmMcK
WmMcK's picture

Long the bulbs (ez bake, not tulip), they're getting harder to find and produce some good heat.

Sun, 01/22/2012 - 19:56 | 2087196 BobRocket
BobRocket's picture

Brilliant article.

 

The bonds held under UK law are cast iron, even if Greece defaults totally and refuses to pay out on any bonds, the UK Government will back stop the UK law bonds, they have no alternative.

Cameron was wittering something about 'property rights' and how the UK is a safe place to do business when he first got elected, he can't stand by and let contracts written under UK law default.

Greece 1 UK 0

 

 

Sun, 01/22/2012 - 20:13 | 2087222 BlackholeDivestment
BlackholeDivestment's picture

...as I was reading the info, I kept getting flashes of an auction. http://www.youtube.com/watch?v=xATiDj5jqjI&feature=related ...only it was the entire global body of labor being soldout through deception, and the corrupt offers of temptation, which define the darkness of the black hole. lol

http://bible.cc/exodus/21-6.htm

http://www.biblegateway.com/passage/?search=Revelation+14%3A9-11&version=KJV

Sun, 01/22/2012 - 20:16 | 2087230 Eally Ucked
Eally Ucked's picture

I have to say that I like that post explaining to the point what MAY HAPPEN but it won't, for simple reason they will find tools to calm markets down, suppress hedge funds, change laws, whatever. The markets have been trained nicely to withstand Greece's default over last few years. They will take a hit and continue (with few victims of course) their day to day business, if not all those nice life styles of our overlords would dissapear and I don't think they're ready to say good bye to that beautiful life.

Greece default will be first step in reducing EU debt load, there will be lawsuits and so on but with minimal impact on overall business and then we will proceed to the next country with the same scenario of slow conditioning to unenevitable fact that it must fail. Any way who lend them money? Computers, somebody collected interest on money which never existed. Greece assets will be transfered to private hands or governements, do they have money to manage them remotely? And how they will make those assets make money for them? Funny.

Sun, 01/22/2012 - 21:10 | 2087286 Bansters-in-my-...
Bansters-in-my- feces's picture

Wow...
That was a good book.

Sun, 01/22/2012 - 21:29 | 2087314 electricgorilla
electricgorilla's picture

What is Phillipat thinking? This was another GREAT article. In my eyes this article was an executive summary. If you printed this article out on paper it would only be a few pages. Zerohedge has just summed up for me in a few pages where we are at with the Greece crisis and how the different classes of bond holders can play there hand. The hedge funds in my eyes have a good hand in buying the "UK Law Bonds" for a possible holdout and blocking position. That someone would spit on someone elses Hard Work givin to you for free is vial and quite distasteful. I bet you didn't even read the article Philipat.

Sun, 01/22/2012 - 22:31 | 2087442 ekm
ekm's picture

GOD BLESS ZH

Without analysis like this from ZH, I would still feel like living in communism in Eastern Europe where all news was controlled. I live in Toronto now.

To any Americans or Canadians here that have not lived in communism before, I'm telling you, the main stream media is not different from communist newspapers.

 

GOD BLESS ZH.

Mon, 01/23/2012 - 00:09 | 2087583 gwar5
gwar5's picture

Thanks Tyler. You're a force of Nature. 

The PIIGS are fools if they don't stick together for more clout, by any means, to represent the people so they don't get slaughtered. Getting picked off one by one is a big mistake.  Sadly, the banker-technocrats in charge and just negotiating amongst themselves, so it'll have to be done in the streets. 

But the central banks have got to pay. The banks continued to make bad bets banging for Welfare-Statism for decades while they were sucking the blood out. With heir power they could have pressured governments to reign it in years ago. The banks need to lose their asses and be bkicked to the curb so they'll stop fucking with our lives. They'll be found in the reckoning.

 

 

 

 

Mon, 01/23/2012 - 00:57 | 2087741 Sizzurp
Sizzurp's picture

A panic run from the bond market will be met with central bank buying, the likes of which has never been seen. Those lucky enough to escape first with liquidity will have no safe place to go but PM's, or other tangibles.  Grab your popcorn, it's going to be an interesting year.  I wonder how large the Feds balance sheet will get before they quit making it public information. 

Mon, 01/23/2012 - 02:39 | 2087929 ucsbcanuck
ucsbcanuck's picture

Here's how the whole Greek thing will play out:

http://www.youtube.com/watch?v=u6-NHK-GzwU

Hopefully all ZHers end up like Vinny Jones at the end LOL!

Mon, 01/23/2012 - 08:26 | 2088152 Colonial Intent
Colonial Intent's picture

Reminds of that old joke where Mao turns to Uncle Sam and says

"No Tyler, the gun is in my hand........."

Seems to be happening more and more often in all spheres of control and influence.........

 

May you live in interesting times:-)

Mon, 01/23/2012 - 08:49 | 2088191 ebailey5
ebailey5's picture

ZH got recognition from Tom Keene of Bloomberg today.  #1:  amazing that the mainstream would recognize such a non-traditional (and irreverent) commentator and #2  give credence to the indepth insight in the well documented commentary.  Extremely well done.

Mon, 01/23/2012 - 09:57 | 2088333 skistroni
skistroni's picture

After reading this, I decided to donate to ZH. Thanks for reminding me what journalism is all about.

Fri, 01/27/2012 - 00:55 | 2101717 SillySalesmanQu...
SillySalesmanQuestion's picture

This site is where journalism and stark, naked truth still reign..Thank you Tyler for a years worth of education in an hour. Another great read and more proof that ZH is the place for the facts.

Wed, 02/01/2012 - 11:13 | 2116274 Oleg
Oleg's picture

Thank you for this article, Tyler. How did you collect the whole list of bonds under greek or english law? I also tried to use GOVERNING_LAW mnemonic, but there is no info for some bonds.

 

Wed, 03/07/2012 - 13:04 | 2232572 omi
omi's picture

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 allthe 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. 

 

Yes, it can, but only to a point. I may be wrong about this, but I think the prefered way of a central bank bailing itself out is:

1. show a loss on the balance sheet

2. Treasury  has to take the loss on that (PnL of central bank acrues to Treasury)

3. Treasury has to borrow cash, goes to central bank

4. Central bank exchanges bonds for cash to treasury

5. Treasury covers the hole in central bank

 

However, there's a problem in that over time, this increases the debt/GDP ratio of countries involved. This would be the case with most countries, however, in case of EU, this is not. Hence I do not think that ECB can do that as it's missing the centralized treasury piece of the puzzle. If ECB just prints money to plunge the holes it would be unbacked currency emmission, and EUR will plummet. This is why you hear calls for creating a centralized entity to oversee the finances of all EU countries under the disguise of 'better fiscal management' of the members involved. I would argue, however, that it's just the opposite. It is an attempt to setup a structure where bailouts are the normal and are continuous. It would solve the problem of naked currency emission as money is printed against some asset - European Union Treasury. 

I'm very interested in this topic, plase let me know if what I've said is not correct.

Tue, 05/15/2012 - 10:05 | 2426722 Shibumi2
Shibumi2's picture

CONGRATULATIONS to Tyler Durdan(s) and STAFF for an EXCELLENT ANALYSIS and, just for good MEASURE...one which happened to be 100% correct!

 

I remember reading this summary back in January carefully as I had been interested in finding an entry point into Greek Bonds. Coming from the wacky world of manufacturing....(that's BUILDING REAL STUFF, everyday products...to you financial types)...I am fact, and logic driven, and this was the first example of what I consider an empiracal analysis complete with data and APPLIED REAL WORLD LOGIC.

 

I did not pull the trigger on the trade for reasons which still make sense to me in hindsight, but I DID add ZH to my daily read and haven't been disappointed in the quality and analysis.

 

99%+ of the BS from the financial world is  an embarrassment...newsletters screaming headlines and world ending disasters that I stopped paying attention to long ago. Although you folks are clearly into the FINANCIAL DOOM camp, you are still jaded enough to continue to try and make a buck while the country swirls the bowl.

 

Count me in!

 

 

Tue, 07/10/2012 - 01:59 | 2601231 piceridu
piceridu's picture

One of the most brilliantly written, well researched, illuminating articles I have ever read...5 stars, kudos, 4 thumbs up...Zero Hedge shines a fucking Petawatt Laser on the sovereign bond ponzi market...Holy shit... 333% returns on distressed debt transaction litigation...should have gone to law school. 

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