Demystify finance

Can the Greek private sector frustrate the Europe Agreement?

If it is agreed that the “voluntary” exchange of 206 billion euros of private sector bonds in new 30-year bonds will meet an acceptance of 75 to 80%, the question of 10-15 % needed to reach the 90% level announced for the operation takes on a new dimension.

According to the Financial Times, it would seem that Greek pension funds and union funds would be required. However, they hold about thirty billion euros of Greek sovereign bonds, the 15% needed to reach 90% or more.

You read that while Greek sovereign bondholders across Europe and the world are preparing for a bloodbath, it is the Greek investors who would be choosy.

Greek banks will benefit from a recapitalization allowing them to bear the cost of conversion: their assets in Greek debt are estimated at 50 billion euros.

Mr. Venizelos, the Greek finance minister, continues to be optimistic, but he does not have much ammunition. One of these is called collective action agreements (CAC): each bond issue contains provisions that govern how to approve changes to the terms of the bonds during their lifetime. Greece, like any issuer, has the means to activate its clauses by proposing changes or mandatory conversion of bonds. Will it be constrained?

Evangelos (in Greek, the announcer of good news!) Venizelos made it clear that he was hoping for an almost unanimous agreement: ” It is absurd to think that there could be a second offer”.

But he will have to use his political weight and this threat as long as there is still time.

Indeed, while Greek sovereign bonds are subject to Greek law and courts, the new 30-year loan will be subject to UK law and courts. Bondholders have made a condition sine qua non of their participation.

However, using CACs would be dangerous. This would be equivalent to the use of nuclear weapons: its explosion would indeed have dramatic consequences far beyond Greece. It is the whole of the financing of the European countries which would lose its credibility and the confidence of the investors, and this maneuver could derail the remarkable improvement of the Italian and Spanish debts of these last weeks.

Would the use of the CAC turn the “selective default” into a pure and simple fault? It is doubtful whether rating agencies could be satisfied with the current Greek rating if coercive measures of one kind or another were used.

The Greek government has a few hours to force these Greek investors to return “voluntarily” in the ranks. Whatever the weapon he will eventually use, the slippage in this operation, which the private sector has given way to forceps, cannot come from private investors in Greece.

This is all the more serious as the first victims of this failure are the Greek workers. It would be almost suicidal.

Athens is at the foot of the wall: let’s hope this is not the wall of lamentations. The IMF’s estimate of a loss of around € 1 trillion in the event of a Greek default is there to remind us that the contagion effect will be enormous: it is not certain that it can be content.

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