March 2012 Market Update – Greek Bonds



The short answer is “not much”.  After three years of waiting for this particular shoe to fall, the international finance community can finally stamp DEFAULT on Greek Government debt.   In fact, they can stamp “World’s Largest Ever Sovereign Default” on it.


“But”, you are saying, “I thought they worked out a swap.”  If you lend someone $100,000 and get back a piece of paper that says “I owe you $50,000” plus interest, that is a bond defaulting by any definition.


This is the deal worked out for the private holders of Greek Government bonds. They will receive something called a CAC, Collective Action Clause. This will entitle them to 15% in cash of what they are owed and 31% of what the original bonds were worth. This will wipe out 100 billion Euros ($150 billion dollars) of the 350 billion Euros ($46 billion dollars) debt that Greece owes.


The remainder of this debt is owed to public entities like other countries and the IMF and ECB (International Monetary Fund and European Central Bank). No one knows when and if they will be repaid. This, of course, is the heart of the European problem.


What remains to be seen on this CAC “deal” is whether Greece can continue to pay interest on these bonds and if they will ever be able to repay the remaining principal. This would require substantial growth in the Greek economy which is highly unlikely.


Another negative effect of the default for Greece, as if they needed one, is that it will be a very long time before Greece can return to the capital markets to borrow money.


One positive aspect of what has occurred is that the default happened in a very orderly fashion. It establishes  a precedent for other  countries such as Portugal, Spain, and Italy who may be next  to be able to bring their bondholders to the table and reach a similar agreement.
Let’s just pray we never have to sit at that table. Whoever represents us will need to be fluent in Chinese.

The last issue which needs to be worked out and is being argued as I write this, is whether this action qualifies as a default in Credit Default Swap parlance. CDS’s are derivatives or bets that a certain entity, in this case Greece, will default or not. If they do billions of dollar will change hands, that is if the regulators decide that this constitutes a true default.  This has never occurred before but then that can be said about just about everything these days.


Enjoy the nice weather this week-end!