It was a long wait, and it finally happened. After a number of attempts at formulating the voluntary private sector involvement (PSI) to restructure Greece’s debt, on March 9 the majority of private holders accepted to exchange their bonds for new longer-dated ones amounting to 46.5 per cent of the face value of their current holding.
Will this lead to contagion into other euro peripheries?- Vincent Micallef
Could this saga have been handled better by the eurozone? Surely, pushing for pro-growth structural reforms such as those recently enacted by Spain to combat high unemployment could have provided a better solution, rather than imposing austerity measures onto a crumbling and comparatively closed Greek economy.
Instead, we are now faced with the first default of a Western country since World War II. One could say that Greece is insignificant in the bigger euro picture, given that its debt is circa 3.5 per cent of euro sovereign debt. However the question remains: Will this lead to contagion into other euro peripheries? Will this lead to a default by the Republic of Italy, the biggest single bond issuer in Europe with €1.94 trillion of debt?
Greece required that a minimum 90 per cent of bondholders validly tender their securities for the exchange to go through. However, to enhance the probabilities of success, Greece passed a retrospective law, enforcing CACs or collective action clauses. This law allowed the Greek sovereign to force a deal, pushing the exchange above the 90 per cent hurdle if at least 50 per cent of bonds issued under Greek law participated in the exchange and two-thirds of those agreed to the deal. A priori it was expected that the use of the CACs would be perceived as a forced exchange, rather than a voluntary one, hence triggering a net exposure of €3.1 billion in credit default swaps (CDS). This is something eurozone leaders wanted to avoid.
As it happened, private investors only agreed to swap 85.8 per cent of their bonds, Greece activated the CACS, the exchange went through and the CDS kicked in.
For their troubles, for every €1,000 of the original Greek bonds, investors received in return:
1. €315 of bonds issued by Greece. These bonds will come as a bundle of bullet bonds with 20 different maturities ranging between 2023 and 2042. Coupons vary, starting at two per cent until 2015, rising to three per cent till 2020, 3.65 per cent in 2021 and 4.3 per cent till redemption.
2. €150 of EFSF bonds – €75 maturing in one year, with a coupon of 0.4 per cent and €75 maturing in 2014 and a coupon of one per cent (the European Financial Stability Facility is a fund financed by eurozone members to address the current euro sovereign debt crisis).
Bonds (1) and (2) above together make up €465 per €1,000, i.e. the 53.5 per cent haircut mentioned above.
In addition:
3. Investors will receive €315 notional in GDP-linked securities. These will detach from the Greece bonds listed in (1) above in 2015 and would have some value only if and when the Greek economy grows. Interest on these bonds is capped at one per cent p.a., from 2015 onwards. At maturity no cash will exchange hands, bar any possible interest.
4. Holders of the retired bonds will also be receiving interest accrued on those bonds in the form of six month EFSF T-bills. These bonds are priced close to par, given the proximity to maturity and the credit rating of the Issuer (EFSF is rated AA+ by S&P, AAA by Fitch and Aaa by Moody’s). However any perceived change in EFSF’s credit standing could send the price of this security lower. It is still not clear to me why the interest payment is being delayed by six months.
Even though the exchange will provide bondholders with a nominal value of 46.5 per cent of original value, investors are actually worse off by 70-75 per cent given that the Greece bonds listed as (1) above commenced trading at a hefty discount to par.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Some of the opinions expressed here above are of a forward looking nature and should not be interpreted as investment advice, nor should it be considered as an offer to sell or buy or subscribe to any investment vehicles or strategies that might have been mentioned in the article. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business. Should you wish to discuss this article in further detail, feel free to contact the author on 2342 6116.
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Mr Micallef is an executive director at Curmi and Partners Ltd.