The default you have when you’re not having a default
Could this really be the beginning of the end for the Greek debt problem that has plagued financial markets for the past three years?
We should know within days because 7am (Sydney time) Friday 9th of March is the deadline for holders of Greek government bonds to graciously accept the kind offer of the Greek Government to exchange their current bonds for shiny new ones.
The only problem for bond holders is that the shiny new bonds come with some shiny new terms and conditions that mean they will be effectively worth around 70% less than the current bonds.
An offer too good to refuse? Well, certainly an offer they are probably unable to, or unlikely to, refuse.
Not only are the citizens of Greece waiting to see if their Government is officially bankrupt, the rest of Europe is waiting to see if the European Union and currency remain intact, and global financial markets are waiting to see if they can avoid the havoc that would be caused by a so-called disorderly default.
What it comes down to is this. If 90% or more of the bondholders accept the Greek bond swap, the exchange will be automatically imposed on the remaining bondholders. This is considered ‘voluntary’ and as such will not trigger a payment on Greek credit default swaps. However if between 66% and 90% of bondholders accept the offer, then the Greek Government is able, and likely to, impose its legislated collective action clause. This will force other bondholders to accept the conditions of the exchange.
This scenario is likely to trigger a payment on credit default insurance which would result in negative flow-on effects on market sentiment. However, the worst possible outcome would be an acceptance level below 66% which would mean no bond exchange in its current form.
Without the bond swap, Greece will not receive the bail out money needed to repay the EUR14.4bn of debt maturing on the 20th of March. This would put Greece in default. The possible implications of such an event would include Greece leaving the single currency and another flare up in market anxiety on debt contagion fears across Europe.
In this context, the current offer does indeed look like an offer bondholders can hardly refuse.
Stay tuned for the ultimate financial markets’ episode of Deal or No Deal.
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