Why Greece has the upper hand

By Felix Salmon
January 20, 2012
Stephen Fidler makes a good point today: the difference between a "voluntary" exchange and a "coercive" exchange, when Greece finally puts an offer to its creditors, is largely semantic.

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Stephen Fidler makes a good point today: the difference between a “voluntary” exchange and a “coercive” exchange, when Greece finally puts an offer to its creditors, is largely semantic. Or, to put it another way, the only real difference is that in a voluntary exchange, you have the IIF’s Charles Dallara saying nice things about the Greeks, while in a coercive exchange, you have the IIF’s Charles Dallara saying nasty things about the Greeks. But the fact is that precious few bondholders who are going to change their vote based on what Charles Dallara thinks.

Most of the bondholders are European banks, and as Fidler says, European banks are subject to “moral suasion” — having their arms twisted by their national governments — which is much more likely to affect their final decision than the official judgment of Dallara. Meanwhile, an increasing proportion of the bondholder base is made up of hedge funds, who certainly don’t care what Dallara thinks.

Landon Thomas reports that the two sides are getting closer to agreement; the sticking point seems to be the coupon on the new bonds, and the likely outcome, on that front, is likely to be just below 4%. No word on the governing law of the new bonds, though I suspect that Greece will go along with doing the market-friendly thing of issuing its new debt in London.

The reason why none of the negotiations really matter very much is, as Fidler says, that “if they don’t agree, the holdouts will have the ‘voluntary’ deal forced down their throats”. Greece is going to bolt collective action clauses onto its outstanding bonds — and use those clauses in what’s known as a “cram down”: the minority has to do whatever the majority wants.

Now with most collective action clauses, this would be non-trivial. Often these clauses require a large supermajority of bondholders to agree before the CAC is triggered — 85%, say. And they’re generally done on a bond-by-bond basis, making it much easier for a hedge fund to build up a blocking stake in one bond.

But Greece is in the very nice position of being able to craft its CACs now, rather than at the time the bonds were issued. As a result, it can set the CAC threshold very low, if it wants, and it can also draft them so that the percentage which matters is the percentage of all bonds tendered into the exchange, rather than the percentage of any individual bond.

All it needs to do then is have a quiet word with the technocrats at the EU, who have a very good idea how much moral suasion they can wield. Greece has a pretty good idea what the minimum take-up of any exchange offer is likely to be. And it just needs to set its CAC level at or just below that minimum take-up level.

Of course, the lower the CAC level, the more coercive the Greece exchange will be considered. If the CACs are set at 85%, the deal will be “voluntary”; if they’re set at 51%, it will be highly coercive. But either way, the deal will get done. And Greece has absolutely nothing to worry about with respect to hedge funds threatening to sue the country in the European Court of Human Rights. Good luck with that one, guys, you’re going to need it.

The only real risk for Greece, as I see it, is that its offer is so bad that less than 51% of bondholders tender into the exchange: you can’t set a CAC below 50%. But I doubt we’ll see that. Banks hate holding defaulted debt. Greece is going to offer them a choice, between holding defaulted debt and holding new instruments which are paying in a timely fashion. When push comes to shove, the banks are going to take the new instruments. Whether Charles Dallara likes it or not.

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