Wednesday, March 7, 2012

It's The Economy Stupid: What's The Deal With Greece?


Thursday at 3 PM New York time is the deadline for Greece's private creditors to sign up for a deal meant to slash 106 billion ($139 billion) off Athens' books and hopefully put it on the path to recovery.


The creditors will take hefty losses if they agree to swap their bonds, but European leaders have painted the deal as the only way to prevent a messy Greek default that would have widespread repercussions for banks and economies throughout the 17-country Eurozone.


Private creditors have been asked to accept to swap their existing bonds for new ones with a face value that is 53% lower and with longer maturities and lower interest rates. Some creditors, including hedge funds, are thought to be weighing up the benefits of holding out for a potentially bigger insurance return from the Credit Default Swaps that they hold.


So let's think about this.  The bond holders would have to recognize a loss of 53% on their positions, and earn less interest on their new smaller Greek investment, which is significantly less than their original investment.  But if the deal fails and Greece can't pay on the bonds, then the value of the bonds would likely fall much more than 53%.  How much?  Well, the defaulted Lehman Brothers bonds have been trading at about 20 cents on the dollar, an 80% decline in value.  And there are real assets that can be liquidated in the Lehman Brothers bankruptcy.  If the deal fails and Greece actually defaults, then the bonds become a non-earning asset and will have to classified as such on the books of bond holders.  That will certainly be a big problem for Greek banks, it will be problematic for some European banks, but will not likely be a big event for U.S. banks.


And then it would raise more questions about the Euro and the European Central Bank's ability to financially police it's members. (More questions?  Is that even possible?)


If less than 90 percent of investors accept the Greek deal, but more than 66 percent agree to the deal, then the Greek government could force the holdouts to accept the swap. That may be considered a credit event — a technical term for a default — meaning bond insurers (Credit Default Swap counterpartys) would have to payout on any CDS that Greek bondholders  took out.


This morning the Greek government has said that 39% of the bond holders have formally agreed to the swap deal.  Tuesday the Greek government said it "does not contemplate the availability of funds," to pay off bondholders who do not participate in the restructuring. 


How do you say 'default' in Greek?




John Broussard

Assistant State Treasurer

Chief Investment Officer

State of Louisiana

Department of the Treasury

Ph:  225-342-0013

Fx:  225-342-9721


Street Address:

445 North Blvd, 7th Floor

Baton Rouge, LA 70802

Mailing Address:

P.O. Box 44154 Capitol Station

Baton Rouge, LA 70804-4154

Physical Location:

One City Plaza, 7th Floor

Corner of North Blvd & 4th Street

Exit 1B I-110 Convention Street,

Turn Left to get to North Blvd,

Turn Right on North Blvd


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