Greece's Bond Default
Greece said some 85.8% of private debt holders of Greek-law bonds and about 20 billion euros of foreign-law debt agreed to take a “hair cut” on their holdings, accepting a promise from Greece for a much smaller payback on their loans. While any number (like 85.8%) should be questioned when it comes from the notorious and now desperate Greek government, we’ll humor them for the sake of global order. Greece enacted a retroactively contracted collective action clause based on the greater than two-thirds count of private debt-holders reportedly agreeing to its proposal. The coerced and clearly unconventional hair-cut was judged by the ISDA to be an effective default on the debt, and it was. This was no surprise, with ratings agencies Moody’s (NYSE: MCO), Standard & Poor’s (NYSE: MHP) and Fitch all effectively cutting Greece’s sovereign debt ratings to default levels over recent weeks.
The decision will trigger $3 billion worth of credit default swaps, with payouts depending on the value of Greek bonds on the open market. Some estimate on the “gray market” that the value of the still questionable private debt to be issued by Greece is worth about $0.21 on the dollar invested, so the holders of the swaps should receive some $0.79 per dollar. In this case, the details are less important than the general action, which effectively validates credit default swaps and projects a new view on the sovereign debt market.
While the securities actions represent a sort of default, they actually support the backing of the troika through the reduction of Greece’s overall debt burden. That said, the new debt Greece has offered its private debt holders remains costly, with an expected yield upward of 20%. That’s because Greece’s already questionable credibility has incurred a seminal change for the worse.
The nation’s crippling austerity is understood by the capital markets to be detrimental to economic growth. I have already written much about my disagreement with Europe’s cure for Greece. It’s like Greece is cutting off its leg rather than setting its broken bone. The reason is so that it can progress today and tomorrow, but the result remains a severely crippled Greece, hampered by its self inflicted injury. That’s not the way I would go about it, and I will answer how I would go about it in the very short-term through a series of reports.
On Friday, the Global X FTSE Greece 20 ETF (NYSE: GREK) gave back some of the gains made since Greece again secured troika support. The iShares S&P Europe 350 Index (NYSE: IEV) did the same. The stock action correctly reflects the uncertainty that remains regarding resolution to this crisis. The shares of the National Bank of Greece (NYSE: NBG) and Deutsche Bank (NYSE: DB) likewise reflected this uncertainty.
So today many are confused as to just what has occurred in Greece. Has it defaulted or not? The answer is yes, it has defaulted technically speaking. However, no, it has not yet failed in its desperate effort to stay afloat. What has happened is that the nation has forced a small number of people to endure some significant pain, those being the private bond holders. Of course, in a complete default scenario, those few wouldn’t do any better. Many believe Greece still will inevitably default on the entirety of its debt or choose a different path post elections, despite the efforts of the troika to ensure payback. If or when Greece does fail due to its (and Europe’s) poorly prescribed blood-letting solution, then I believe the euro-zone should fall apart as well.
The reason for this is of course contagion and something more. The events of last week should not weigh on the sovereign credits of Portugal or any of the other PIIGS beyond any short-term bump. Yet, the euro zone scheme remains a poorly devised half-solution for the region, designed to help it compete in the changing global marketplace. However, only when its national components sacrifice sovereignty will the fiscal union hold for the whole. That scenario will not likely develop, though, due to human attachment to culture, history and tribe. Thus, I say the failure of the euro zone is probable.
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