"Well," said the animal, "I know many vegetables that are very clear on that point. Which is why it was eventually decided to cut through the whole tangled problem and breed an animal that actually wanted to be eaten and was capable of saying so clearly and distinctly. And here I am." …….
"A very wise choice, sir, if I may say so. Very good," it said, "I'll just nip off and shoot myself."
(D.Adams, The restaurant at the end of the Universe)
Douglas Adams the writer of the Hitchhikers Guide to Galaxy, in his science fiction book the “The Restaurant at the End of the Universe”, has a wonderfully surreal scene. Guests at the restaurant are asked to choose which parts from a live animal they wish to eat, while watching the end of the Universe. The animal voluntarily wants to be eaten.
In a strange sort of way this is what Troika is demanding from Private bondholders. Bondholders are asked to voluntarily kill, or at least half-mutilate themselves while the guests (Troika) are watching the end of Greece. The end however could be either a big crunch (default) or a whimper (no default but just slow death).
This I guess is the 14.4billion euro question (Redeeming on 20th March 2012). Would the end come with a default or would it be just a big whimper? In other words, a slow drift to a cold death with no bangs and no defaults.
My guess is that it all hinges on what the ECB does with its Greek bond holdings. Answering this would in my mind give you almost certainly the answer to the Crunch/Whimper dilemma. Here is why:
ECB owns around 20% of the outstanding Greek debt in Bond form. If it is excluded from the PSI then others would free ride on the back of the ECB driving participation down and making the introduction of CAC (Collective Action Clauses) to force it up almost inevitable. There are many problems with this strategy and we have outlined them in previous posts (CAC Warpath, PSI Enigma, ECB and Europe, ECB Accounting). With or without the ECB, however, there are very few that would gain from a default. Banks holding bonds outright certainly don’t want this. The ECB does not want this as it would mean losses for her and also supporting the Greek banking system. Germany and the EU would have a much bigger problem to solve in an election year. After all, Germany benefits from the lower value of the Euro caused by the Greek crisis. It would be optimal to stretch the rope to the breaking point but no further. Only a small fraction perhaps less than 5% would stand to gain. The net CDS volume is around 3billion and is insignificant. So, why is it you may ask that they cannot find an agreement to the PSI? To me all this back and forth is just poker playing trying to secure a better deal. Viewed under this light, many actions make more sense. The only problem is that the rope might break earlier and for unforeseen reasons (Greek political turmoil for example).
Big Whimper (Slow cold death)
If on the other hand Europe finds a way to relieve the ECB of its holding or if the ECB decides to take the hit and participates in the PSI, the hold outs would be reduced to a minimum. Namely, to retail bond holders and possibly owners of Greek bonds under English (non-Greek) law. In this scenario, Greece would not need to cause a credit event or introduce CAC’s to force the participation up. It would also respect market practices and give time for reflection and Election (see France, Germany)!
The end game is very hard to call. Rationality and logic point towards a whimper solution. Human failings and unpredictable events point to a big bang. D.Adams motto in the hitchhiker guide to the galaxy is DO NOT PANIC.