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.
“ 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.”
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'.
„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
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- Modi’s Great Leap Forward
India’s Currency Ban – Part VIII India’s Prime Minister, Narendra Modi, announced on 8th November 2016 that Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes would no longer be legal tender. Linked are Part-I, Part-II, Part-III, Part-IV, Part-V, Part-VI and Part-VII, which provide updates on the demonetization saga and how Modi is acting as a catalyst to hasten the rapid degradation of India and what remains of its institutions. India’s Pride and Joy Indians are...
- Global Recession and Other Visions for 2017
Conjuring Up Visions Today’s a day for considering new hopes, new dreams, and new hallucinations. The New Year is here, after all. Now is the time to turn over a new leaf and start afresh. Naturally, 2017 will be the year you get exactly what’s coming to you. Both good and bad. But what else will happen? Image of a recently discarded vision... Image by Michael Del Mundo Here we begin by closing our eyes and slowing our breath. We let our mind...
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...