PSI Participation at 85% to Trigger CACs

Finally the umpteenth deadline for Greece has come and gone and everybody seem satisfied with the outcome: due to the high participation rate (over 85%), the PSI  deal can be rightly regarded as a success. However, just as was ecxpected all along, the participation rate did not reach the threshold necessary to avoid the activation of retroactive collective action clauses.

As Bloomberg reports:


Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a 130 billion-euro rescue package designed to prevent a collapse of the Greek economy. Ministers freed up 35.5 billion euros in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.


“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

Stocks rose while the euro fell after the government in Athens said it will trigger an option forcing some investors to take part in the exchange. Officials from the International Swaps and Derivatives Association called a meeting today to consider a “potential credit event” relating to Greece.


Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said. Bondholders tendered 152 billion euros of Greek-law bonds, or 85.8 percent, and 20 billion euros of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.”


With Greece now in a fifth year of recession, Prime Minister Lucas Papademos’s government had said that it was ready to force holders of Greek-law bonds into the swap. The use of collective action clauses may trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.

Greek Finance Minister Evangelos Venizelos said that participation “surpassed expectations” and he would recommend to Cabinet the authority to activate collective action clauses.

“This is a dangerous precedent that has been set,” John Wraith, fixed-income strategist at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “Countdown” with Linzie Janis and Owen Thomas. For Greece, “yes, it is probably necessary, but it is just another hurdle crossed rather than some sort of solution.”


(emphasis added)

A few comments to the above:

A) the PSI deal is not “designed to prevent a collapse of the Greek economy”. It is designed to keep the charade of the common currency and the fiat money/perpetual debt Three Card Monte game of the Western welfare states going.

B) Schäuble is correct. “We” are not out of the woods. The opportunity will most assuredly be squandered if the past is any guide.

C) If ISDA fails to declare a credit event, the market for sovereign CDS is probably dead. Alas, as you will see below, the market is anticipating that ISDA will relent.

D) The result was good enough to avert a 'disorderly' default, but it is clear that the 'voluntary' nature of the debt swap is a complete farce. Due to the fact that public sector lenders to Greece such as the ECB, EU and IMF did not participate in the 'haircut' exercise, Greece's debt load remains at an unmanageable level even after the PSI deal.


Credit Market Charts

Below is our customary collection of charts,  updating the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Thursday's close.

CDS on Greece ended at a new all time record high of nearly 26,000 basis points on Thursday – a sign that market participants think that the declaration of a  'credit event' by ISDA is a foregone conclusion.

Other sovereign CDS and bond yields generally eased again on Thursday.



5 year CDS on Portugal, Italy, Greece and Spain – CDS on Greece end at a new record high on the eve of the debt swap deal – a nigh incredible 26,000 basis points – click chart for better resolution.



5 year CDS on France, Belgium, Ireland and Japan – click chart for better resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – click chart for better resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click chart for better resolution.



5 year CDS on Romania, Poland,  the Ukraine and Estonia – click chart for better resolution.



5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click chart for better resolution.



CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – click chart for better resolution.



Three month, one year, three year and five year euro basis swaps – a little better again – click chart for better resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – dipping further – click chart for better resolution.



5 year CDS on two big Austrian banks, Erste Bank and Raiffeisen Bank – click chart for better resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – click chart for better resolution.



5 year CDS on Australia's 'Big Four' banks – click chart for better resolution.





As it has now turned out, ISDA has declared that Greece has experienced a 'credit event'. This is not unexpected of course, but the market reaction late in the day (stocks were selling off a little bit after the announcement) indicates that market participants are somehow 'surprised'.

Marketwatch reports:


„The International Swaps and Derivatives Association said Friday that the Greek government's use of collective-action clauses, or CACs, to amend to terms of Greece-issued bonds qualifies as a "credit event" for Greece. A credit event requires a payout to those who held credit default swaps as insurance to protect themselves in the event of a Greek default. The ISDA decision could trigger payouts on $3.2 billion of those insurance-like contracts, according to Dow Jones Newswires. The news comes after the Greek government announced that 83.5% of its private-sector bondholders agreed to a bond-swap deal. That rate fell short of the 90% needed to prevent legal force to get the rest of the private bondholders to participate, so Greece's finance ministry said it got approval for CACs, which would bring the total participation rate to 96% by forcing some bondholders on board.“



Charts by: Bloomberg



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