Thursday, 8 March 2012

D-Day in Greece

It's crunchy time in Greece. The long-awaited debt default will happen today, or it won't. Today holders of Greek bonds are voting on whether to accept a short-back-and-sides and allow the value of their holding to be reduced by about half.

The aim of the whole "rescue Greece" operation is to protect the big, mainly French, German and American, investment banks. It's not actually to rescue Greece or protect the Greek people from penury.

The key issues here are: will enough bond-holders vote for the haircut for it to be deemed voluntary? And if not will enough bond-holders vote in favour for it to be possible to use CACs [collective action clauses] to allow the Greek government to force the deal through in an involuntary manner. Or will so few bond-holders agree, that Greece simply goes bust and everyone loses everything.

The distinction between voluntary and involuntary is important because many bond-holders also have CDSes [Credit Default Swap agreements, effectively insurance policies] to cover themselves against an involuntary haircut.

Mainly it's the independent bond-holders who have CDSes, not the big banks or Greek pension funds. And there are a load of CDS-holders who don't even have any Greek bonds - they are just hoping to profit from a Greek default by insuring something they don't even own.

Now here's the rub. The big banks are holding Greek bonds and could go bust if Greece defaults. But they can take a certain amount of pain. And they are either owned by various national governments or are completely dependent on them for cheap money to stay afloat, so they have to do what the governments want. However the exact same banks have also issued a load of CDS paper - so the banks are being forced to accept a voluntary haircut, because if it isn't voluntary then the CDS insurance will trigger and there will be a whole other (and much larger) banking crisis.

The "turkeys voting for Christmas" include the banks under French or German thumbs, plus the funds controlled by the Greek government itself, like the public sector pension schemes. This adds up to about 60% of the bonds.

However the minimum required to force through the haircut would be 66%. And some argue that should be 75%. If 95% agree it becomes deemed-voluntary for everyone and the CDS holders get stuffed.

Voting ends at 8PM tonight, and we should know the outcome tomorrow.

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