Greece’s two-stage default

December 11, 2012

Greece’s bond buyback has succeeded, after a fashion. There weren’t enough bids by the original deadline of Friday, but then the offer was extended and two things happened. First, Greece’s banks bowed to the inevitable and tendered all of their bonds, rather than just most of them. And second, the Greek government made its most explicit default threat yet:

Stelios Papadopoulos, the head of the Public Debt Management Agency, stated “We have decided to extend the Invitation to offer Designated Securities for exchange to 11 December 2012. Holders that have not tendered so far can still take advantage of the liquidity opportunity offered by the Invitation. Investors should bear in mind that even if Greece accepts all bonds tendered in the Invitation, it will continue to engage with its official sector creditors in considering further steps to put its debt on a sustainable path. Future measures may not involve an opportunity to exit investments in Designated Securities at the levels offered for this buy back.”

In English: you can hold on to your bonds and hope to get paid out in full, if you want — rather than accepting 33 cents on the dollar right now. But be aware: Greece has to do what its official-sector paymasters tell it to do. And if it takes “further steps to put its debt on a sustainable path”, who knows how much money you might end up with when it’s all over. Are you sure you don’t want to just take those 33 cents?

Joseph Cotterill makes a good point: with the Greek banks now having been taken out of their bonds, the low-lying fruit for any future restructuring offer is now gone, which means that in any future restructuring, Greece is going to be dealing with hard-nosed hedge funds rather than complaisant domestic banks. That said, Greece might conceivably now have a nuclear option in its back pocket: the comments to Cotterill’s post are full of speculation that Greece might be able to find a way not to cancel the bonds its buying back. In which case it could use its new supermajority vote to cram down a very bad deal indeed on any holdouts.

All of which is to say that this buyback deal is increasingly feeling a lot like a second default, just months after the first one. It’s good for the optics of Greece’s debt-to-GDP ratio, and it doesn’t seem to be triggering any CDS. But it’s a useful lesson for any other European countries (Ireland and Portugal are the obvious next candidates) who are thinking about restructuring their private debts. You don’t necessarily need to do the whole deal at once: especially if you are clever in your use of collective action clauses, you can start with a small and insufficient haircut, and then follow it up with a second restructuring a bit further down the road. If your creditors are largely domestic banks, that could work out much better than socking them with one-off monster losses.

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