As 'news' breaks of over 80% participation [9] in the Greek PSI deal and the apparent optimism that this is somehow a good thing, we note that our analysis of what would happen from two months ago [10] was exactly spot on. As the FT reports, "financial markets were already betting Greece would default again in the future. Grey market “when issued” pricing for the 20 new bonds were ranging from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes", which just happens to almost perfectly coincide with our view:
"since the Greek Debt/GDP will still be over 120% according to another set of rumors (after all, only a small portion of the country's debt is really getting impaired), it is 100% safe to say that in 30 years Greece will still go bankrupt. So let's say it deserves a comparable yield to its current 30 year bonds, which are priced to yield about 23%. We are being a little generous and estimate the fresh start bonds will yield 20% post break. Which means that according to a generic bond yield calc, the price on the fresh start bonds post reorg will be... 17.9 cents of par, or immediate losses of over 80% the second these bonds break for trading from par."
Simply put, as soon as these 'new' bonds hit the secondary market they will reprice from 'par' down to around 20 cents as expectations of default sooner rather than later (and with 98% inevitability given grey market CDS and bond pricing) leave Greek bondholders with more losses to come and the Greek people inevitably facing tougher austerity to get the next PSI deal through in perhaps six months to a year...
Furthermore, for those looking at the trend of participation news today and expecting it to rise any further, just as we have noted before many times, the FT confirms:
In addition, the status of the 14 per cent of Greek debt not issued as Greek-law bonds, most of which are bonds governed by English law, remained unclear. According to a confidential analysis prepared for eurozone finance minsters last month, 95 per cent of all bondholders must be included in the debt restructuring for Greece debt to reach 120 per cent of economic output by 2020, the target of its new €130bn bailout.
Greece cannot reach that target with Greek-law bonds alone, and Athens may need to wait until a meeting of foreign-law bondholders at the end of the month to know how many will join the restructuring.
For clarity, here is Peter Tchir (of TF Market Advisors [11]) perspective on the day's events:
Papademos Says Expects Maximum Participation in Greek Debt Swap
I'm not sure why 100% isn't maximum possible, but math and Greek politicians don't seem to go well together.
I expect a number between 75% and 98%. I expect every bank and most regulated entities to vote for it - how many Greek bonds are held by Europe's bad banks and bailed out banks? My guess is it's a disgustingly high number.
Below 75% and my guess is they accept those offers and default on the holdouts - but only after extending the offer for a few more days.
Between 75% and 98% they use the CAC and try and move on. There isn't enough time between now and March 20th to do anything more interesting.
Above 98% I will go and try out for the giants as starting quarterback, because clearly anything is possible. But if it is somehow above 98% (CDS is 1.5% and I expect mostly held in basis and no incentive to agree).
I don't think it makes much difference whether the number is 77 or 95. All we will really learn is if any banks didn't feel obligated or which hedge funds decided the plan was ok. Maybe the market will react differently if it is 77 or 87 or 97 but it really shouldn't.
The Credit Event will settle smoothly. It is the net that matters, not the gross, and the net is relatively small. Any bank that doesn't have money to pay on CDS they wrote, after LTRO is beyond inept. Any banks without enough collateral from any hedge fund that sold them protection is equally inept - though this should be an exchange based product or at least cleared.
The potential knock on effect will be if banks demand larger collateral requirements going forward and if other sovereign bonds start leaking again - especially since LTRO has margin calls of its own.
I doubt we get a Credit Event until next week- as they likely won't do it late on a Friday.
If we find out that the invitation has been extended I would get concerned that they didn't hit the 75% threshold.
Some English law bonds might have to be dealt with separately if there were blocking votes, but there is time for that.