GREEK BONDHOLDERS: The last big unknown on the road to Greek default

The site summed it up two weeks ago: ‘large bondholders say the take-up is likely to be high, if only because the alternative of a full-blown Greek default is so bad’.

However, the key words there are ‘large bondholders’. These are, on the whole, the big banker guys with a lot to lose from Greek default: many of them are the same guys from ISDA who last week voted against seeing an open-and-shut case of bond-issuer default as a default. It was a case of turkeys voting for the abolition of Christmas. But the markets are not about to abolish it.

Yesterday, the pessimistic view came from London. The Daily Telegraph financial columnist Louise Armitstead wrote that ‘Authorities in Athens are ready to enforce the controversial collective action clauses, or CACs, to impose the restructuring deal on all bondholders as the number of voluntary agreements look set to fall short of the required amount’. And the influential Open Europe website’s Raoul Ruparel opined that, “Greece is likely to struggle to reach the targets for a voluntary agreement, so the credit rating agencies are almost certainly going to see this as a default.”

This makes for a stark contrast with the remarks of IIF negotiator Charles Dallara (above right), who yesterday pronounced himself “quietly confident” of the swap going ahead without complications.

Clearly, they can’t both be right.

There are a number of other players involved apart from the instituions Charles Dallara claims to represent. The hedge funds are said to have anything from $10-$50bn of exposure in terms of Greek bond purchases. To make a decent profit, they need a default. Some of them already feel screwed by ISDA: they’re not in the mood to compromise. As I keep on saying, nobody knows what these guys will do – or even whether their holding is,say, $12bn or $52bn.

Then there is the US Fed, and the White House. They are, respectively, out to protect the US Dollar banking hegemony and the President’s electoral chances. They’re worried about other stuff too: the raw materials in the Med and the Aegean around Greece; military bases from which to contain Islam; and the access to Cyprus as a friendly mid-Med island….especially after today’s Turkish opportunism on the sovereignty issues there.

I retain a confidence in my sources. They say that the US has what it sees as a deal with the EU: you dump Greece and grow a firewall to protect all the banks, we help you prop up those banks. Of course it is typical of the Americans to think they can reliably plan such unpredictable outcomes to protect themselves: but that there IS a plan, I have no doubt. Whether it succeeds or not is another matter.

The Fed will have an armlock on some of the IIF members. Charles Dallara will be aware of some of it. But all of it? I doubt that. Deals will be done and promises made to ensure that American will prevails. But will it prevail over fear?

And of course, there is the patriotic German contingent in Bankfurt….along with Schauble’s Finance Ministry, the FPD, senior CDU members nervous about German debt exposure, and the ultimate successor and survivor, Chancellor Angela Merkel. Far less of their institutions hold Greek bonds than did so four months ago – and all of them are either sandbagged by Draghi money, or buoyed up by Berlin guarantees. They too can be persuaded to do Berlin’s bidding. In many cases, that is exactly what they want to do anyway. For them, the deal is some short-term losses versus the long-term financial viability of Germany.

It’s a no-brainer, especially for the likes of Bundesbank boss Jens Weidmann, who yesterday again demonstrated Bankfurt’s determination to limit eurozone losses. In a letter leaked to Mario Draghi at the ECB, Weidmann made his diapproval of both LTRO and the separate ECB bond deal with Athens abundantly clear.

The news leaking in dribs and drabs from Athens yesterday was that the Greeks themselves are pessimistic about bondholder take-up being enough to keep the deal voluntary. Everyone has until Thursday to sort that one out. Don’t be surprised if, during the week, a new bondholder offer is forthcoming. Because – and one shrinks from saying anything with certainty about this circus any more – if the CACs have to be used, then compulsion is obvious, and it’s a full-blown default.

Remember: we’re talking about escrow monies, only half of it having been approved, and almost none of it going into Greek hands. This is 130bn euros that could be rapidly redeployed elsewhere in the eurozone if enough powerful people decide that Athens is beyond help. I think most of those people decided that weeks ago: I still think they have every intention of letting this deal unravel, having now taken all the steps they can to contain the likely tidal waves resulting from that. I still think that – even if by some circuitous reality alteration – the bond swap proceeds, elements within the default-planners will ensure that Greece goes down anyway.

My suspicion remains that toing and froing will continue into next week, and then – ‘reluctantly’ – the eurozone will kiss Greece goodbye. But anything and everything can go wrong in a war, and be under no illusion: this is a war for survival. I am fairly certain that the US/EU axis have no idea just how surely they are kissing their asses goodbye by playing these games, because the one element they still seem unable to take on board – widespread civil unrest and potential revolution among the ClubMeds – is going to wind up deciding far too many things in the end  – as it always does.

Last night, Lucas Papademos said resisting the austerity measures in Greece would “set the country on a disastrous adventure” and “create conditions of uncontrolled economic chaos and social explosion”. Along with boils, a plague of locusts, and a collapsing sky. It’s bollocks, naturally, but the sheep have to be nipped into the pen. A poll of more than 1,000 Greeks for the Kathimerini newspaper yesterday found that 67% said a return to the drachma would make the country’s situation worse compared with 13% who believed the country would be better off with its own currency. But that’s what happens when you ask a bunch of people their opinion about something they don’t understand: Greece would, in the medium term, be far better off without the euro. And contingency plans for a return to the drachma have been drawn up in Athens, Berlin and Brussels.

Anyway, today is Monday. The participants have between 70-80 hours to get their various ducks in a row. Whether those duck will fly – or simply be shot in a barrel – will be much clearer by next weekend. Stay tuned.

18 thoughts on “GREEK BONDHOLDERS: The last big unknown on the road to Greek default

  1. I hope that everybody is realizing Greece isn’t just a word but includes like 11 million of people,who are about to have a nervous breakdown from the insecurity.If EU leaders want us to default,they’d better let us default with some dignity left.


  2. @Lorenza

    Providing only that you exclude from the generic term ‘everybody’, politicians, finance bods of all ilk and bureaucrats, I think your hope is probably right.

    Speaking personally I am struggling to decide whether my contempt for ‘the powers that be’ is greater than my anger at them, for what they have allowed to unfold at the least and very probably in large part engineered, with regard to Greece and her people.

    Saying that alone is probably of little value to you. But I am every day seeking out ways that some ‘pay back’ may eventually be extracted from those morons and that is a complete reversal of how I had lived my previous decades. If ‘everybody’ goes through the same sea change of attitude, some effect will eventually be measureable.


  3. And to be more clear,even though i am not exactly greek,i am just living here the past 20 -almost- years.I am not an analyst or en economist,i am just an oil engineer who got laid off last week so excuse my plain english.Greece would never ever be in such deep waters right now if in 2003,had started collecting taxes from the Church,had stopped providing free limos for the ministers-no matter the party- and the archbishops and if it had exploited its’ natural sources.
    Church holds in property -tax free of course- approximately the 1/3 of the national debt and the state the other third in unexploited land standing still with a huge sign in the middle of vast acres.

    How can be driven to such a painful default a rich in sources country is still a mystery to the average citizen .For me is pure mismanagement and providing sanctuary to privileged ones.recent example Dora,Bakogianni who smuggled 1 million euros to non greek banks .Obviously 1 million euros was the earnings of her serving the people (……….)
    All the above might sound as details to an economist ,in our book is the root of the very problem.The division between State and Church might had helped Greece .But that goes back in the 80’s when PM was Andreas Papandreou who canalized the law but found the parliament against him.
    Something you might be looking into is the circulating rumors that the personal loans & mortgages issued by the National Bank of Greece are being postponed.If it’s true,that means that Greece is going to be declared in a state of emergency and it will speed up the exit from the euro.



  4. Thank you.
    The anger,the clashes,the gatherings everything that all of you might have watched in the news and we see it here live,is generated by the injustice placed on the people who are blamed for crimes they didn’t commit.If this is peace,i really wonder why so much fuss for the nuclear disarm with the Salt I & II .
    Kindest regards


  5. τα επισημα στοιχεια,φανταζομαι
    δεν θα’θελα να δω τα ανεπισημα θα μου ανεβει η πιεση παλι.


  6. For local bondholders to take a loss on their own sovereign debt is to turn the logic of international finance on its head and it will create the worse sort of precedent while trippling the hardships on the local savers who are already paying higher taxes, and suffering falling incomes under the austerity program.
    Recall that the problem is one of excecessive EXTERNAL debt, that it was the external investors who facilitated the current account deficits.
    Local savers must be saved if they are to save the country in the future
    See more peripheric views on the intra-Eurozone external imbalances in the blog PPP Lusofonia


  7. Lorenza and others
    Very dangerous spam virus just popped onto the thread back there. Do be careful NOT to follow any suspiciously long links and short/no comments.
    Sorry about that. JE


  8. It’s tragic what’s happening – all caused by Politicians / Banksters and others – now squabling over the ‘pickings’ before a final bye-bye and goodluck .
    For Greece, 10-11 million lives ruined and an uncertain future .Nobody knows the knock-on affect around Europe but for sure, there will be .
    And before the dust settles, move on to the next country….Portugal ?
    It would be interesting to FFWD 1 year and look back at world and point out the major changes based on todays actions / knowledge .

    I see an interesting thread JW there – maybe sometime you could pull an article together to give us an insight way down the road……


  9. Charles Dallara is playing the part of a stooge here. The call for a voluntary haircut just doesn’t fit into private investments. Note that any major player in this bond market will have bought insurance contracts in the form of derivatives to lay off most of the loses.

    Debt forgiveness is a virulent tumor that will spread if initiated.

    Note that the Greek situation must form a model for dealing with the rest of the PIIS and if Greece gets alms then the others will expect the same treatment, a course that will hike the debts even higher.

    This is just the beginning of the collapse of the EU from massive and unmanageable debt. When debts grow faster than real GDP growth there is no way to escape ultimate defaults or bankruptcy.

    Greece must default and be the first to exit the EU.


  10. Indeed. A new model of Nuremberg is needed to bring the political elites to account for the mass destruction they have caused to their countries and the lives of millions. A defence of “I was only doing my job” or “I was following orders” would not be permitted.


  11. Perhaps one or two of the senior ‘crats could pay a visit to Athens and we could have a Sarajevo moment (without a war to follow of course).


  12. I read somewhere over the weekend (the trader perhaps) that much of the insurance actually resides in the UK rather than the US. Wall Street is said to have learned the lesson after the AIG collapse.


  13. John , I posted the full Lombard report ( which has been the subject of much speculation ) above…. I would be interested in your take on what’s presented therein. BTW , love what you bring forth with your writing and you are a must read for me !


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