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Greece Pulls Off Debt Restructure With CACs


Greece managed to get the “Private Sector Involvement” in a deal that restructures their debt, effectively making lenders forgive $100 billion euros. This will give them access to a second $130 billion euro package, which is essential for their survival. Investors will receive new bonds for 31.5% of the old bonds’ face value in the debt exchange. They will also get warrants that state the if the Greek GDP expands more than expected, the bond holders get paid higher.

This applies only to private owners – the ECB will not take a haircut and whatever bonds it has will be transitioned to new bonds at 100% of the face value. The reason is that the hit to the ECB would have rendered it insolvent. Plus, since the ECB bought at lower prices, the return of full face value counts as a “profit” which goes to the Eurozone nations, who are (I suppose) expected to use that money to fund the new $130 billion euro bailout? Confused? It’s an accounting scandal of biblical proportions designed to make you believe that Greece is not bankrupt, when it really is. There, I said it.

With 85% of bond holders under Greek law submitting their bonds “voluntarily” into this program, Greece has decided to use “CACs” (Collective Action Clauses) to force the remaining bondholders (under Greek law) to participate, thus taking the participation rate to above 95% of total Greek debt.

An interesting but probably irrelevant (as in too small to bother) discussion is about whether the deal was truly voluntary and will CDS insurance be triggered. The ISDA will decide in a meeting today, but even if CDS is triggered, the impact seems to be well understood.

The shame here is that public holders of debt don’t get to take the hit. I know the haircuts were supposed to be voluntary, but they really weren’t – it was about getting back some 30-40% of your money or none at all. The changing of seniority of the debt, mid-term, is not a good precedent. Greece is supposed to be an “exception”, and time will tell if it really is.

The uncertainty only begins now. Will Greece be able to rein in its spending? Will Portugal not go down the same route? Will everyone want a bailout? More importantly, if this tiny thing like Greece required a massive intervention of this sort, what happens when someone goes down in size? This might be closer to the endgame where everyone will have to forgive everyone else’s debt eventually. But meanwhile, should we expect a few statements over the next week, of this kind: We forgot to count XYZ so this Greek haircut means we are nearly bankrupt ?


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