[LINK] Two links about the unfolding of the Greece debt crisis

[rfmcdonald]

This morning, Crasstalk poster Baldwin Periphetes outlined the latest stage of the Greek debt crisis.

206 billion Euros worth of debt, in the form of Greek government bonds are due for repayment at midnight Friday, Athens time. Greece does not have 206 billion Euros lying around. The newest in a long line of repayment plans will be voted upon by the bondholders (read: hundreds or thousands of banks and investment funds around the world). At 10pm Athens time, 3pm EST in America, voting closes. And then the manure hits the ventilation device.

The plan put to the bondholders is extremely complicated in the detail. The short version is that it involves swapping the existing bonds for new low-interest bonds maturing in 2042 plus 12 and 24 month bonds drawn on the European Financial Stability Facility (the bailout fund laid on by the rest of the Eurozone, predominantly Germany). Felix Salmon explains in more detail (for the finance tragics only) here. Pundits seem to think this will wipe off anywhere from 40-60% of the value of the debt, depending on how the market values the replacement long-term bonds and whether it thinks Greece can even pay back the debt with around 100 billion Euros wiped off overnight.

[. . .]

If over 66% of bondholders vote for this plan, the Greeks have announced their intention to use the so-called “Collective Action Clauses”. This amounts to a retrospective law passed by Greece which allows them to impose the deal on holders of Greek bonds as long as the 66% approval threshold is reached.

It was part of the deal struck by the big bondholders and is meant as a weapon to cow the rest of the bondholders: if you vote no, it says, there is still no chance the Greeks will pay you in full, plus stuff will get even worse because in the eyes of the markets, Greece will have defaulted (the rating agencies and most other relevant bodies have confirmed that the Greeks exercising this option will be treated as a default- there’s not really any other way to describe it). There’s some messiness here, because the Greeks issued some of the bonds under English or Swiss law instead of Greek law, but for 86% of the bonds the Greeks can implement this plan by force.

Greece has also hinted that bondholders who vote no might find themselves left with their old bonds, on which Greece will default completely, instead of receiving the new bailout bonds like everyone else.

Why legislate away part of the debt instead of all of it? Because for one, they are trying to maintain some level of creditworthiness for the future, and for another, even after dealing with these debts they need money from the Germans and other European countries, money which will not be given if Greece refuses to repay the bonds at all.

Effectively, this option amounts to default with a plan, an orderly default under which European governments and major financial institutions will still do business with Greece, although no-one else will offer so much as a copper coin to Greece again for 20 years or more. This seems to be the most likely outcome.

And Reuters seems to indicate, in the article "Greece closes in on bond swap, hurdles key threshold", that this is what's happening.

Greece moved closer to wrapping up its bond swap with private investors on Thursday, indicating that it had already cleared a vital threshold needed to pass a deal which will hand bondholders steep cuts in the value of their investments.

With less than three hours to go before the 2000 GMT deadline on the biggest sovereign debt restructuring in history, a senior official said the government had acceptances covering more than 75 percent of bonds eligible to take part in the offer.

Finance Minister Evangelos Venizelos told cabinet the deal was on track and no surprises were expected, a minister told reporters after the meeting chaired by Prime Minister Lucas Papademos.

"I look forward to maximum participation by the private sector, which will contribute significantly to the effort to adjust and restore our economy," Papademos said, according to a statement from his office.

Greece had said that it would abandon the deal if it did not receive at least 75 percent participation in the offer and it required two-thirds take-up to deploy a legal device to force the bulk of any recalcitrant creditors to accept the terms.

Major banks and pension funds have agreed to accept cuts of around 74 percent in the value of their holdings in exchange for new bonds as part of a deal that will cut more than 100 billion euros from Greece's massive public debt.

What will happen next? Guesses, anyone? Certainly we'll find out soon enough ...