Greece’s bond exchange: it’s official

By Felix Salmon
February 24, 2012
greekbonds.gr, you can now find an actual official document!

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If you go to the official website for the Greek bond exchange, greekbonds.gr, you can now find an actual official document! The rest of the website, it says, “will be available shortly”, whatever that’s supposed to mean.

The document gives us most — but not all — of the information that bondholders will need in order to be able to decide whether or not they’re going to tender their bonds into the exchange. It’s written in very dense legalese — the first sentence is 70 words long, with only one comma — so let me try to pull out the important bits.

This is complicated, as you might imagine. It makes a significant difference (a) what bonds you hold, whether they’re Greek law or English law, and also (b) where you live, whether it’s in Europe or in the US. (There are also, it turns out, Swiss-law bonds as well, which have their own very special treatment.) But at the end of the day, most bondholders are going to get pretty much the same things when they tender their bonds; you’ll forgive me for ignoring some of the more niggly stuff.

Firstly, they’re going to receive new Greek bonds, maturing in 2042. It doesn’t matter whether the bonds you’re holding mature on March 20, or whether they mature in 30 years’ time — everybody gets the same new long-dated bonds, according to the face value of what they now own. In other words, the value of Greek bonds right now is wholly a function of what their face value is, and has nothing to do with their coupon or their maturity date.

The new Greek bonds have a step-up coupon: 2% through 2015, then 3% through 2020, then 3.65% in 2021, and then 4.3% from 2022 through 2042. Bondholders will receive new bonds with a face value of €315 for every €1,000 of old bonds they hold. (Again, remember that it’s face value which matters here, not market price.) What’s the market price of the new bonds going to be? Not very much; my guess is that they’ll trade at roughly 40% of face value. Which means that the “NPV haircut”, as far as the new Greek obligations are concerned, is somewhere on the order of 87%.

But bondholders will get more than just Greek bonds; they will also get new EFSF notes. The new EFSF notes come in two flavors: one-year notes and two-year notes; their face value is going to be 15% of the face value of the tendered bonds. The working assumption right now is that they’re going to be worth €150 for every €1,000 of bonds tendered: in other words, if you look at the value of what bondholders are going to be receiving in exchange for their bonds, it’s going to be split roughly 50-50 between Greek bonds and EFSF notes.

We don’t know that for sure, however, because for reasons I don’t pretend to understand, the coupon on the EFSF notes is still undetermined; we’re just told that it will be revealed on the Issue Date. (And no, we’re not told what the Issue Date is going to be.) In any event, bondholders in the US won’t receive EFSF notes at all; instead, they’ll receive “the cash proceeds realized from the sale of the EFSF notes they would otherwise have received”.

Finally, bondholders will receive GDP warrants of some description, which are the vaguest thing of all. “The GDP-linked Securities will provide for annual payments beginning in 2015 of an amount of up to 1% of their notional amount in the event the Republic’s nominal GDP exceeds a defined threshold and the Republic has positive GDP growth in real terms in excess of specified targets.” How much are these warrants going to be worth? The working assumption has to be zero, at least until we get some numbers for the minimum GDP and GDP growth that Greece needs in order to pay out on them.

When bondholder tender their old bonds to receive new ones, two things will happen. First, the old bonds will have been accruing interest since their last coupon payment. That interest will not be paid out in cash; instead, it will be paid out in the form of six-month zero-coupon EFSF notes. Why? This is just stupid nickel-and-diming: is there any reason why the EFSF is better off paying that money in six months rather than just paying it now?

Second, the bondholders will almost certainly vote, when they tender their old bonds, to bail in everybody who doesn’t tender their bonds, and force them to accept the same deal. That’s the Collective Action Clause (CAC) that you might have been reading about.

Will the CACs be used? Will the exchange even happen? That depends entirely on how many bondholders decide to tender into the exchange. (We’ll assume for the time being that if you tender, you’ll also consent to implementing the CACs; there’s no obvious reason why anybody would do the former without doing the latter.)

In order for the CACs to even come into existence, let alone be triggered, Greece needs two-thirds of its old bonds to be tendered. If it doesn’t reach that threshold, then the whole exchange is a bust and won’t happen at all. Indeed, Greece says in this release that it won’t go ahead with the exchange unless it gets at least 75% participation. If fewer than 75% of Greece’s bondholders tender into the exchange, then Greece won’t accept those tenders, and we’ll have a chaotic default.

If more than 90% of Greece’s bonds are tendered, then the exchange will be a success, the CACs will be triggered, and Greece’s old bonds will be replaced by new bonds. And because the CACs will be triggered, you can be sure that CDS will be triggered as well.

And what happens if the participation rate is between 75% and 90%? That’s vaguer. In that case, says the press release, “the Republic, in consultation with its official sector creditors, may proceed to exchange the tendered bonds without putting any of the proposed amendments into effect”. Which seems to me to say that if you tender into the exchange then you’ll get new bonds, and if you don’t tender into the exchange then, um, well, you’ll be left with your old bonds. The implied threat here is that Greece will pay out on its new bonds but won’t pay out on its old bonds — and bondholders who didn’t participate in the exchange will be left with claims on the Greek government which they’ll be lucky to ever collect on. Of course the CDS would be triggered in that case, too — it would be a clear-cut default. But Greece would have a large outstanding stock of unpaid debt for the foreseeable future.

The idea here is to prevent would-be free-riders from holding out in the exchange, refusing to tender their bonds on the basis that if they hold out, then they’ll just get bailed in by the CACs anyway. That strategy works if there’s more than 90% participation, but it becomes very dangerous if there’s less than 90% participation.

Will this strategy be enough to get 90% of Greece’s bondholders to tender into the exchange? I suspect it might. And of course if the takeup is between 75% and 90% Greece still has the option of exercising the CACs and bailing everybody in anyway. (Note that “may” in the press release which I bolded.) Chances are, that’s what it would do: it’s better for Greece to have one series of bonds outstanding which it isn’t in default on, rather than lots of series of bonds outstanding where it’s in default on most of them. But we won’t know for sure until after the results of the bond exchange are made public. And we won’t even know what bondholders are thinking with respect to the terms of the exchange until we get more details on the GDP warrants and the coupon on the EFSF notes. When will that come? Your guess is as good as mine.

17 comments

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So are these 75% and 90% percentages on total amount issued, or just those held by private investors?

If the CAC is triggered, how does it only apply to private investors and not Greek pensions or other EU governments?

Posted by a.soffronow | Report as abusive

Regarding the EFSF notes in place of what they initially said was the cash collateral: is this a semi-sneaky way of jump-starting the EFSF/EFSM debt market. Right now, there are only the few issuances done to fund Ireland and Portugal, creating a (fairly) thin market. After this swap, there will be much more floating around, establishing a more liquid market and making future issuances a bit easier. Of course, all of these issuances are relatively short maturity, but still..

Just a thought.

Posted by autocorrelation | Report as abusive

@a.soffronow, the ECB has sprinkled magic dust on its Greece bonds and converted them to different bonds with the same coupons and maturities. So at this point, private investors (including Greek pension funds) own all the Greek bonds outstanding. And they’re all being treated equally.

Posted by FelixSalmon | Report as abusive

What about Greek bond credit default providers; do they get a free pass???

Posted by sgp | Report as abusive

” What’s the market price of the new bonds going to be? Not very much; my guess is that they’ll trade at roughly 40% of face value.”
You are optimistic, I would say 10 to 15 top.

Posted by alea | Report as abusive

What a clusterf**k. It would have been more “orderly” for Greece to have simply said “we default”, and nobody gets another dime in interest or principal.

Posted by DCWright | Report as abusive

@DCWright: don’t worry, the disorderly default is still to come.

Posted by MorgantownJoe | Report as abusive

I’m betting that Morgan town Joe is right… this deal is about to fall on it’s face.

Can anyone tell me what Europe gets in return for their 15% contribution? To me this would be like congress voting to give a massive amount of aid to a single state.

Next can anyone explain to me why Greece is bothering to pay the last 13%? I suppose that token jesture is sort of like a thank you paid for out of the new bailout money.

Lastly, where will the Greek budget stand in 2013. Their interest payments just fell by something north of 85%. What % of their budget was debt service? My guess is that they will have borrowing needs in 2013 and beyond.

If this deal is consumated on terms anywhere near the ones just announced investors the world over need to take a good hard look at the risk/reward profile of soverign debt. What interest rate justifies the risk of a 72% loss of principal?

Posted by y2kurtus | Report as abusive

@a.soffronow It doesn’t. Greek pensions hold a lot of GGBs, and they’re about to go semi-broke. That’s one reason why bailout 2.0 needs so much money. Other reasons include refinancing greek banks, which also hold a lot of GGBs, and money to be used as “sweeteners” in the deal.

The reason it doesn’t apply to other euro goverments’ bonds is because, as Felix was written (see “The Greece game turns chaotic”) they’ve already converted them in shiny new different bonds which are not part of the deal.

Posted by dandraka | Report as abusive

How could the average bondholder possibly make a rational decision about turning in his bonds? Are the major holders – banks or whoever – going to hire programmers to calculate the alternatives, then monitor some sort of polls to see whether the mandatory bail-in will apply? Is there a secret formula that some privileged holders will be able to apply?

Posted by skeptometric | Report as abusive

Perhaps its time to re-visit the debate on the Sovereign Debt Restructuring Mechanism:
http://www.cigionline.org/blogs/new-age- of-uncertainty/g20-and-sovereign-debt-re structuring-mechanism

More generally while the bond exchange is part of the solution, I can’t hel but think that people forget that the problem faced by Greece and other European periphery countries is that they are experiencing twin crises (fiscal and current account crisies). And, twin crises mean that they need two policy tools to deal with the situation.

So far policy makers have dealt treated the situation mostly as a fiscal crisis and ignored the current account crisis; and as a result they have focused on one policy tool — financing of the Greek fiscal psoition to avoid “default”.

The other policy tool, to deal with the current account imbalance, is a devaluation. The classical internal devaluation means high unemployment and prolonged recesion. External devaluation avoids much of these problems. The periphery therefore needs to consider options for an orderly euro exit and devaluation (as well as financing).

http://www.specie-flow.net/2012/02/22/it s-twins/

Two policy tools for twin crises.

Posted by TorrensHume | Report as abusive

I’m going to nay say here, and vote this a miracle. I, also, disdain Euro Socialist pinky wavers, but I never thought they would even get this far. It’ll be a mess, but they are going to pull this off after all. Just expect the future to hold Gyros restaurants every other shop in Melbourne.

Posted by ARJTurgot2 | Report as abusive

I think I agree with Turgot2, there will be a mass exodus from Greece but in the end that will be the biggest help for the Greek people. If these bailouts can be coupled with a medium-sized influx from the EIB and 10% of Greeks (roughly 1m) seek their riches abroad then this story can have a happy-ending (which is to say, a muddle through without things getting ‘Arab Spring’-worse).

Posted by CDN_Rebel | Report as abusive

they cant just stop paying the old bonds if only 75%-90% agree to the swap. the time period for the whole procedure is so short – there must be tons of people out there who will not respond at all (people who deliberately dont want to but also people who just cant in that time frame…). what an outrage if these people are suddenly left with nothing…
my take of all this:
full payout to old bonds if >90% agree to the swap
deliberate uncertainty between 75-90%
no deal bel ow 75%

Posted by gggonzo32 | Report as abusive

Why don’t the Greek government just replace all the legal BS – with the simple wording along the lines of:-

“Ha Ha – we’re a bunch of fraudsters and we’ve suckered you again – we have your money & you can’t get it back. We might give you some toilet paper in exchange. Now we’re going to gets lots of lovely free money from our fellow swindlers and liars the leaders of the 4th Reich. Of course we won’t pay it back – you the peasants and suckers will do that for us”

Posted by mgb500 | Report as abusive

Why don’t the Greek government just replace all the legal BS – with the simple wording along the lines of:-

“Ha Ha – we’re a bunch of fraudsters and we’ve suckered you again – we have your money & you can’t get it back. We might give you some toilet paper in exchange. Now we’re going to gets lots of lovely free money from our fellow swindlers and liars the leaders of the 4th Reich. Of course we won’t pay it back – you the peasants and suckers will do that for us”

Posted by mgb500 | Report as abusive

Reporters tried to interview the Ying Ying, but all immersed in the new joy in the hope to keep some personal space, did not accept interview