Tuesday, 6 March 2012

Happy PSI Voting

Sir Arthur Eddington the famous British physicist and author of a book on relativity when asked if it is true that only 3 people in the whole world understand Einstein’s theory of Relativity he famously said “I wonder who is the third?”

In the same spirit I pose the question “Is there anyone in the world that understands the PSI invitation documentation?”. Because if there is there are thousands of investors, institutional and other that would love to hear from him. There are too many questions that remain unclear. What happens to the Japanese bonds/investors? How about non-qualified investors? What happens if I abstain from voting? Does the Republic have the right to alter the result after the voting by exempting some bonds from the counting? Is the 75% threshold an absolute one or a soft one that can be changed simply by a ministerial decision? Which laws does the Greek Bondholder’s Act 4050/2012 (introducing CAC) suspend? How about European law? Act 4050/2012 is invoking the “highest public interest” and “Mandatory provision” of Article 9 EU593/2008 (see box) which suspends the law applicable to contractual obligations.

In a couple of days the PSI offer would be closed, unless of course the Hell.Republic exercises one of the many rights they have given to themselves and extend the offer for few more days. Obviously, extending the PSI even for 1 day is not exactly a sign of healthy demand for the new Greek bond beauties but may give enough time for investors to understand exactly what Greece is offering to them. You may also have the time to read the un-official translation of the now famous Greek Bondholders Act 4050 that retrofitted the CACs.

The Key is the 75% option threshold
There are three basic scenarios in the invitation:  
  1. More than 90% or 185Billion are tendered for the exchange. In this case, the offering states that Hell.Republic would proceed with the exchange. It leaves the question of activating CAC’s open. In any case, if they activate them the marginal gain would be small as most of the hold outs are Foreign law bonds and these CACs do not apply (they have their own)
  2. If more than 75% (154.2billion) but less than 90%(185billion) tender for the exchange then the Hell.Republic intents to use the CAC’s after consulting with Troika. Again, if it is, say 89%, then not much is gained by activating but if it is 80% then it looks very likely that they would force everyone (apart from the Foreign Law ones). 
  3.  The third scenario is the really crucial one and is the key to the whole PSI success or failure. The Invitation states that if less than 75% (154.2billion) tender their bonds for exchange and less than 75% give their consent to the use of CAC’s the deal is off. The PSI is a stiff Dead ex-Parrot (The Monty Python way). This is possible as investors have the option of not tendering their bonds but still voting in favour of the activation (probably a CDS holder has interest in doing so). 
What if 75% is not reached?
So what exactly may happen if it is less than 75%. Answering this would give you the answer on how to vote. If the participation is very close to 75% then by kicking some bonds out of the PSI (yes they can do this) they could possibly reach the 75% threshold (in the remaining) activate the CAC and presto. The exempt bonds could then be bought in the open market in a separate buying offer (Yes the Invitation caters for such a case). If on the other hand, participation is much less but still more than the 66 2/3 that is required by Law 4050/2012 (English translation here) then Hell.Republic may claim that the law overrides the Invitation, they activate the CAC’s and coerce everyone once more.
Now what if they cannot do this trick or they are stopped by some higher moral authority then what is the sequence of events?
  • Most Greek policy makers want us to believe that this is the end and that Greece would default in a disorderly manner. Greece is saying that if investors do not accept the offer it would commit suicide.
  • Somehow the suicide does not seem logical to me. It also makes little political sense for Europe to force Greece into this predicament. After all this may be the first time that failure is not 100% the responsibility of the Greeks. Everyone even the German side admits that the PSI was and is a bad idea. In this case, Europe would have to give a loan to Greece to pay the March12 bond and concoct a new and simpler way to reduce the burden for Greece. The new offer probably could be a buyback tender offer at 30% (say). This would reduce the Debt/GDP (in nominal terms) even more than the 53.5% haircut.
  • Of course there is also the possibility that Greece passes a law making all Greek bonds zero coupon 30Y maturity. Since the PSI collapsed the 177bilion are still under Greek law.
    So depending which doomsday scenario you believe you should cast your vote accordingly. If in your mind there is no way Europe can let Greece default disorderly despite the war-words then not tendering may be optimal, especially if you own the March12 bond. If you believe that Greece can default and that you will get even less than what is on offer right now then the optimal is to tender. HAPPY VOTING.