The most recent addition to the "I am Jack's complete lack of surprise" pile comes from Reuters, which reports that the latest out of Greece is a proposal for even greater cuts for creditors than previously expected. From Reuters [11]: "Greece's private sector creditors could take a loss of more than 70 percent in a planned debt swap, Finance Minister Evangelos Venizelos said on Tuesday. "There is a very serious discussion based on new facts. We are talking about a PSI much greater than the original," he told lawmakers, referring to private sector involvement in the deal. "We are talking about a haircut on the net present value exceeding 70 percent," he said."
What this means, simply, is that when calculating the NPV of the post-reorg bond, the Yield to Maturity is now less than 30%, and thus is likely going to have a cash coupon of about 3.6%. This is relevant because as is known, one component of the creditor recovery is receipt of EFSF bill in lieu of cash to the tune of 15 cents of notional, and the balance, at least until this point, would have been a 35% yielding piece of post-reorg paper (for a 50 cent total cut as agreed upon in the October bailout). That was the case when the cash coupon was 4%. Going forward, and assuming a 3.6% cash coupon, the return on this fresh start debt drops substantially. Needless to say, creditors will almost certainly balk at this, because when it comes to calculating real yield, most are expecting a roughly 90% recovery at best on the EFSF strip (as every fund will scramble to dump their paper), so 14 cents on the total, and then funds are also hoping for at least 1 year of current yield, i.e., cash coupon. It becomes iffy around the 2 year mark, as it is a roughly 90% probability that Greece will file for bankruptcy yet again just after the first coupon is paid, at least according to hedge fund return calculations. It also means that nobody gives a rats ass about the IRR (as nobody expect to get post-reorg bond principal at maturity), and all are solely concerned with what the cash coupon will be that they can collect for one, max two years.
Which explains why at 14 cents + 3.6 + 3.6 or 21.2, which is where Greek paper trades currently, there is absolutely no upside for creditors, and the only real upside option is to hold out for sovereign debt litigation, where the recovery could be as high as par. Expect no deal to come out of this, despite what the IFF, which now likely represents just Deutsche Bank and SocGen, says. So much for that upper hand.