Greece’s game plan

By Felix Salmon
January 18, 2012
an important interview to the NYT on Monday night.

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Greek prime minister Lucas Papademos gave an important interview to the NYT on Monday night. Think for a minute about the natural fractiousness of bondholders, and then read this:

Mr. Papademos said that if Greece did not receive 100 percent participation in a program in which bondholders would voluntarily write down $130 billion from Greece’s unwieldy $450 billion debt, the country would consider passing a law to require holdouts to take losses.

“It is something that has to be considered in the light of expectations about the degree of the participation to be achieved,” Mr. Papademos said. “It cannot be excluded. It is contingent on the percentage.”

This is a pretty clear message: if the bondholders don’t agree to Greece’s terms, then Greece can simply force them to join the exchange. Greece’s bonds are issued under Greek law, and Greece can change its own domestic law any time it wants.

My guess is that this is exactly what’s going to end up happening. Papademos has two sets of advisors: its bankers, Lazard, and its lawyers, Cleary Gottlieb. Lazard’s Greece team is headed by includes Mark Walker, the former managing partner at Cleary Gottlieb, and Cleary’s Greece team is headed by the dean of sovereign debt advisors, Lee Buchheit. Bondholders, in general, have a lot of experience going up against Walker, Buchheit, and Cleary generally. And whenever that’s happened, the sovereigns have won, and the bondholders have lost. Just ask anybody who held Russian domestic debt in 1998: Russia’s lawyer, back then, was Mark Walker.

Meanwhile, the lead negotiator on the creditor side is the IIF’s Charles Dallara, an amiable buffoon whose main purpose in life is to try to make sure that everybody likes him and thinks that he’s important. When faced with hard-nosed and single-minded Cleary types, he’ll be useless — especially given that the banks have already cut him off at the knees by refusing to let him negotiate on their behalf. He can wave his hands around and agree in principle to a deal, but he can’t actually commit any bondholders to participating. Which means that the “negotiations” are really just an opportunity for Dallara to talk a lot (he likes doing that), and for Greece to flatter him into “agreeing” to whatever it is they’re going to do in any case.

In her interview with Papademos, Rachel Donadio says that “European leaders are set against” the idea that Greece’s credit default swaps should be triggered, on the grounds that it “could ignite a chain reaction with unpredictable and potentially catastrophic results for the world financial system”. She’s wrong about that: it couldn’t. The only thing a CDS trigger does is make sure that people who bought insurance on a Greek default get paid when Greece defaults. It would mean that the people doing the insuring lose money, of course. But anybody writing an insurance policy has to be willing to pay out on it — especially when you’re insuring a credit as risky as Greece. A CDS trigger would not be catastrophic at all, and there’s really no reason to try to avoid one.

The real negotiations are the ones which are certainly going on behind the scenes, between the troika (the EU, the ECB, and the IMF) and the Greeks. The one thing which Greece needs is for the troika to keep on funding Greece’s deficits. And so it’s the troika — the organizations who are actually providing money, here — which holds all the cards. As in any bankruptcy, if you put up cash, you call the tune.

So the only thing that needs to happen here is for Greece to quietly find out from the troika what kind of bond-restructuring terms would be acceptable to them. Greece then puts those terms into a formal offer, and makes acceptance of that offer effectively compulsory for bondholders. The troika declares a successful bond exchange — because it happened on exactly the terms that they wanted — and continues to lend Greece the money it needs to function as a viable sovereign. Game over, at least for the time being.

Now politically, the EU would very much like to have a bunch of smiling bankers going around saying that they’re happy with the bond exchange, rather than a group of extremely irate creditors who feel railroaded into a dreadful deal. So everybody’s going to try to be as nice to the bankers and Dallara as they possibly can be, to try to get as much good PR for the deal as possible. And maybe, at the margin, the banks can extract some concessions in return for their smiles — perhaps the new bonds will be issued under London law rather than Greek law, for instance.

But the big-picture game plan is clear. Greece is going to default, on March 20, and there’s really nothing the banks can do to stop it. If you’re not willing to accept whatever deal Greece comes up with, you probably shouldn’t be holding Greek bonds at all.

Update: Lazard informs me that its team leader in Greece is Matthieu Pigasse, the head of the bank’s sovereign advisory team, not Mark Walker. They also say he didn’t work on Russia.


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Two small points. One, collective action clauses don’t only bind private bondholders but all bondholders including the IMF and ECB. Will these esteemed organisations agree to take a hit to their balance sheets?

Two, the Troika wants 2% interest due to the Greek economy deteriorating, while bondholders want at least 5% on the new bonds. I can’t see much smiling going around at the banking table, which implies unintended consequences. Bankers will likely treat European sovereign debt very differently, post Greek default.

Posted by Lloydie | Report as abusive

A very good article, indeed! This is probably the first sovereign rescheduling in history where there is no official Steering Committee appointed by all creditors. Hopefully, March will see happen what should have happened 2 years ago: the existing debt has to be separated from the Fresh Money requirements. The latter should come from EU/IMF (for budget deficit) and from the ECB (for current account deficit). And the holders of existing debt are invited to form a Steering Committee which has the mandate of all creditors to negotiate with Greece a rescheduling of maturities. No haircut; new evergreen bonds instead!

Obviously, at this point Greece has to start being serious about serious things. No more games about promises which are not kept, etc. Much more pain will have to come of Greece’s public sector and public administration. But there should be a carrot for all of this.

That carrot should be a giant investment program for the Greek economy financed by foreign investors, EIB, EU Structural Funds, etc. (but not the Greek tax payers).

The above Fresh Money for budget and current account deficits will be about 3 BN EUR per month. After hearing about 3-digit BN EUR figures for so long, European tax payers will find that amount to be quite reasonable, particularly since it would now serve a positive purpose (instead of throwing good money after bad). For once, there would be light at the end of the tunnel.  /default-seems-to-be-approaching-if.htm l  /according-to-s-eu-leaders-have.html

Posted by klauskastner | Report as abusive

Are CDS prices relatively cheap, or not? I imagine smarter hedge funds would be looking to force a CDS trigger, after buying CDS’ when the price had a greater profit than the bond loss. But then I’m not a smart hedge fund, so opinions welcome :)

Posted by RichardWatson | Report as abusive

And my comment is really linked to the final sentence “If you’re not willing to accept whatever deal Greece comes up with, you probably shouldn’t be holding Greek bonds at all.”

If you do want a CDS trigger then holding bonds means you can’t have a naked CDS taken away from you. So holding the bonds becomes insurance that you can keep your insurance. I think.

Posted by RichardWatson | Report as abusive

Can we assume that the contingent liability contained in writing protection on Greece has not been factored into the EBA’s capital stress teats for EU banks?

Posted by nixonfan | Report as abusive

Another point: Given the irreconcilable factions involved here, the process must eventually become disorderly, probably before March 20th. In the end, those who bought protection will get paid, and those who sold it will pay.

Posted by nixonfan | Report as abusive

Your assertion that Rachel Donadio is wrong about the potential consequences of CDS triggerring fails to address the issue. Your counterpoints, that those who sold CDS insurance will and should have to pay on it, and those who bought CDS inurance deserve to get what they paid for, may well be true. However, they have nothing to do with what might be the CONSEQUENCES of CDS coverage being triggerred. This is the issue raised by Donadio, which you seem determined to avoid in all your recent postings on the Greek debt issue.

Posted by chris9059 | Report as abusive