As a condition to getting its next bailout tranche to pay a March bond redemption, Greece needs to get private creditors to write down enough of the ~200 billion euros of Greek debt they hold to theoretically allow the country to achieve a debt to GDP ratio of 120% by 2020. Creditors are willing to voluntarily take about a 69% NPV haircut, for an average coupon of 4.25%. The troika wants a 3.5% coupon, which is more like an 80% NPV hit. If they don't come to an agreement, theoretically, Greece defaults - hard.
In my previous post, I spoke of potential blocking positions held by hedge funds. It seems this may not be as relevant as I thought. SoberLook has some great work about this issue, and I would refer you to this post and its comments.
So, if the hedgies are not in a position to block, what's the hold up? I think there are really two answers to the question. Worries about CDS' being triggered are not one of them.
Firstly, banks realize they hold the upper hand. A Greek default would cause the realization of losses for taxpayer funded entities, like the EFSF. So far, there have been no realized losses for governments, and every effort is being made to avoid them for fear of stirring public rage.
Secondly, the IMF has recently been applying pressure for public entities like the ECB to take part in the restructuring. They are doing this because their October 2011 estimates for 120% debt/GDP by 2020 with a 50% haircut have worsened along with Greece's economy, and that same haircut would now leave Greece with a 135% ratio. Of course, the ECB publicly is proclaiming that it will not take part in the restructuring, with Germany supporting their position. But, like nearly everything about this Euro crisis, be careful what you believe. As I see it, the ECB will take part in the haircut, as it is the single largest holder of GGB's, at an estimated 40 to 60 billion euros. (Whether that is par value or acquisition value, mostly at ~70 cents, I don't know.) To not do so would further frighten investors in distressed sovereigns, as the ECB as a super senior creditor would lessen the pool of discountable bonds should PSI be necessary elsewhere - like in Portugal, for example.
What are the ECB's options in this regard?
1. Retain the bonds and write down them down from par to the acquisition price. This would be seen, correctly, as debt monetization, and would probably not be enough of a write-down to make a difference.
2. Retain the bonds and write down them down to well below the acquisition price. Again, debt monetization, as well as a hit to the ECB's capital. It could make up the capital hit either through seniorage or a capital call to its shareholders.
3. Sell the bonds to the EFSF at the acquisition price, which will then do the write-down on its books. This would lead to the EFSF's first realized losses, and may serve as a wake-up call to its guarantors that this mess may actually cost their taxpayers some cash.
4. Sell the bonds back to Greece at the acquisition price. This would give Greece about 15 to 20 billion euros of debt forgiveness, assuming 45 to 60 billion par value GGB's acquired at a 30% discount. Of course, Greece does not have the money to buy back the bonds, so that would have to come from its bailout package, lowering the amount available for the future.
Of course, this all assumes that the technocratic government in Greece will be able to apply enough sphincter lube to accept the latest set of Troika demands, spelled out here: Troika spells out its demands
Stay tuned....
Greece, Portugal, And LTRO (TF Market Advisors)
UDPATE: "The German government wants Greece to cede sovereignty over tax and spending decisions to a eurozone “budget commissioner” to secure a second €130bn bail-out, according to a copy of the proposal obtained by the Financial Times." (FT) Now we're talking SERIOUS sphincter lube!
