Greece gets tough on potential holdouts
This, I think, is a major change of tune from Greece.
When Greece first launched its exchange offer, on February 24, the language about when and whether it would active its collective action clauses was long and complex. I’ve uploaded the original press release here; the relevant language is at the bottom of page 2 and the top of page 3, and has caused a lot of confusion. (Simone Foxman, for instance, reported yesterday that if Greece gets 90% participation, the CACs would not be activated. That’s the exact opposite of what Greece said in the press release, where it declared its intention “to declare the proposed amendments effective” in that event.)
Today’s press release, by contrast, is a lot simpler. Never mind the old distinctions about what happened if the take-up was less than 66%, or between 66% and 75%, or between 75% and 90%, or above 90%. Instead, we just get one, simple rule:
The Republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds.
In other words, there are collective action clauses, and if Greece can trigger them, it will. End of story.
Greece has also now explicitly talking about default; as far as I can tell this is the first time it has done that.
The Republic’s representative noted that Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI.
This isn’t quite as drastic as it seems at first blush. Remember that Greece has now said that if it can trigger the CACs, it will. So if more than 66% of bondholders tender into the exchange, then everybody will end up with new bonds, whether they tendered into the exchange or not.
But note that this only applies to the Greek-law bonds. The English-law bonds need a 75% take-up, on a bond-by-bond basis. So it’s possible that the Greek-law bonds will be successfully exchanged, while some or all of the English-law bonds end up in default.
The English-law bonds are ultimately something of a sideshow, except for purposes of Greece’s CDS, where they might well end up being the instruments tendered into the bond exchange. But this new stance from Greece now makes the outcome of the Greek CDS auction very uncertain indeed: if one English-law bond fails to get 75% participation and gets defaulted on, then that bond will certainly become the cheapest bond to deliver into the exchange, and the CDS payout will be much higher than current market prices are anticipating.
My feeling is that this press release is an attempt to maximize the participation of holders of English-law bonds. If they hold out, Greece is saying, then the exchange is very likely to go ahead without them, and they’ll be left behind with nothing to show for it except the prospect of a long and painful court fight. Under the terms of the original press release, Greece kept open the possibility that it might pay hold-out creditors in full. Now it seems to have closed down that possibility. Which makes the upside of holding out much smaller.