A few weeks ago, some of the more naive media elements reported that Greece has "all the cards" in its negotiations with private creditors, a topic we had the pleasure [19]of deconstructing in its entirety to its constituent flaws? Well, a day ahead of the February 15 Eurozone meeting at which Greece's fate is finally supposed to be settled, things appear to be quite amiss. As a reminder, a critical part of the Greek debt deal is the private sector's agreement to roll over existing holdings into new bonds, which as we learned may now see the 15 cent per bond sweetener into new EFSF debt reduced. According to the Handelsblatt, that is now off the table. Dow Jones summarizes [20]: "Some central bankers expect that Greece will fail to enlist enough private investors in a voluntary debt restructuring to avoid a technical default, a German newspaper reported Tuesday. Greece is likely to make its case for a voluntary debt swap after a meeting of euro group finance ministers Wednesday, the Handelsblatt newspaper says. The Greek government is seeking to lower its burden by EUR100 billion. Handelsblatt cites unnamed central bank sources as saying the country will fail to achieve that goal, leaving the government little choice but to make the write-down mandatory for investors holding out. Requiring investors to take a loss would prompt credit rating agencies to declare a debt default for Greece, an event with unforeseeable consequences for financial markets. The report doesn't specify whether its sources are with the European Central Bank or with the German Bundesbank. Neither bank would comment early Tuesday." Which of course is not news: after all even the rating agencies have long warned a Greek default is now inevitable, and a CDS trigger will follow. The only thing that there is massive confusion over is whether and how this event will impact everyone else, and whether it will lead to an explusion of Greece from the Eurozone. Optimism is that it is all priced in. So was Lehman.
A Google translated version of the news from the Handelsblatt [21]is as follows:
The bailout of Greece got into a farce. It is expected that achieved after months of struggle, the agreement between private creditors and the Greek government announced a "voluntary" waiver while on Wednesday after the meeting of the Euro Group. But it seems clear now that the debt section of approximately 70 percent will not be sustainable. Federal Reserve districts do not expect more that enough owners of Greek government bonds, will join the voluntary agreement for a waiver. With too little participation but the targeted debt relief for Greece of € 100 billion would not be achieved.
So go Fed circles believe that Greece will change the loan terms by law. Such a waiver agreement would be binding for all bondholders, when 50 percent of bondholders to vote for. This would also include small investors and hedge funds.
Both the policy and the European Central Bank (ECB) had insisted that the average debt must be "voluntary" to prevent an official Greek insolvency. For such a payment default - also called credit event - would mean that the Kreditversichungen (credit default swaps) on government bonds, with the investors had secured, would be due. This in turn - so feared the crisis manager - would trigger a chain reaction in financial markets.
It is not clear yet whether the ECB would join in this week with their holdings of Greek government bonds, a voluntary waiver. From its bond purchase program, the ECB will hold 40 to 50 billion euros of Greek government bonds.
If there is a compulsory participation of all bondholders is still unclear whether the ECB can then get a special status. Institutional investors such as hedge funds are likely to sue in such a case they suffer.
As a reminder, earlier today we learned that the ECB has formally rejected please to take losses on its debt, refuting yesterday's latest Dow Jones rumor to the contrary, and will merely forego losses on its Greek bond holdings. At this point we should probably offer another award for an explanation of how any entity could have a "profit" on a security it bought in the 70 and 80s, and which is now trading in the 20s, or at all time lows. But we are saving our cash for the BLS moles...