Friday, 4 May 2012

Greek Elections, Foreign Greek Bonds

On Sunday 6th of May the French and the Greek people would have a chance to vote for the first time since the debt crisis erupted in Europe. For France we already know the results of the first round and it looks that Sarkozy is toast. Greece on the other hand is a different story.  The two main parties that have governed non-stop Greece since 1974, the centre-left PASOK and the center-right ND, are wounded but are not dead. In fact, despite polls showing them commanding less than 40% of the electorate, chances are that the two parties would survive the onslaught and form a coalition government. Let’s look at the scenarios:

1.              Pasok and ND collectively get more than 50%. Then they will have a comfortable majority in the parliament of perhaps close or more than 180 MP’s (150 is the threshold). In this case Greece’s EU membership should be safe for at least the foreseeable few months. The 180 number is the constitutional supermajority that is needed to vote in a president and also enhance the acceptance of the laws being passed.
2.              The two parties get close to 40% and manage to pass the magic 150 number that would give them parliamentary control. In this case however, the argument of the opposition that they do not represent the will of the people would be strong. Implementing the actions of the Troika agreement would become problematic. Furthermore, the newly emancipated voters might suffer from the “Power of the convert” and become more militant. These are the voters which for the past 40years voted either PASOK or ND. Passing the Rubicon and giving their vote to someone else is a major self-event. The two center parties would have difficulty putting them back in the herd.
3.              The two parties fail to reach the required percentages and need a third party to form a coalition government. This is the volatile and unpredictable scenario.  Forming a government would probably take more time and Greece does not have the luxury of time right now. 
The sad thing is that none of the above scenarios are ideal. They differ only in the perceived amount of time it would take for the coalition to collapse. Unfortunately, almost after 3 years the crisis erupted and apart from some extremist parties the Greek party landscape is the same. There are only a couple of parties that speak the language and values of Europe (DRASI, DIMIOURGIA XANA) and they would straggle to get elected.  Many Greeks find it very difficult even now to vote anything other than PASOK and ND. The typical argument I hear time and time again is I do not like Mr/Mrs. X because of this or Mr/Mrs Y because of that. Giving a food analogy, it is as if someone who was fed SPAM meat for 10years is now presented with a proper meal and he does not eat it because there is no salt on the table. All kinds of self-excuses are made. No doubt psychologists and political analysts would make a career out of this paranoia disorder.
The main danger is that Greece is getting divided once more. This time the division is between Europe and Anti-Europe.  The division takes many forms. There are some like the communist party that advocate a communist state. Their ideal is North Korea’s Kim Il Jong but with a better hairdo. Other parties want to stay in Eurozone but do not want any of the obligations or responsibilities that membership entails. They want to milk the cow but not feed it or have anything to do with it. Polls show that asking the question Euro vs Drachma the overwhelming majority chose Euro. Changing the question to add the responsibility that Euro membership entails and the polls get reversed.
 In other words, whichever way you look at these elections the truth is that they are transitory for Greece. None of the parties has managed to capture the imagination of the people, perhaps because their leaders lack the cognitive ability to form a vision for the future.  In this respect Greeks must wait for future elections and future leaders to find redemption.

Bond Dates. Failure to Pay
Greece has a bond redemption coming in on the 15th of May and a coupon on the 8th. It would have to pay 435million (originally was 450million) Euro to the hold outs of this English law bond (XS0147393861). This is part of the 6billion that refused the PSI through the bondholder meetings. Would Greece fail to pay? The rhetoric so far from Greek officials is that there is no money allocated for hold outs. The truth is however, that the decision maker is not the Greek government,, assuming there is going to be one, but Europe and Germany. They are the ones that call the shots and also have the money to pay. So chances are that Greece would not pay this bond on the 15th. That of course does not mean that bondholders would not get their money back sometime in the future. It is simply too early and too close to the PSI for Europe to start paying recalcitrant bondholders.  There is of course a month grace period but this can be used only if Greece intents to pay but has difficulties collecting the money (operationally or otherwise).  In other words, if a Greek official comes out and states that Greece does not intent to pay or it would not pay then the grace period does not matter. This would constitute a far more serious event in the history of European Bond markets as Greece would become the first Eurozone country that strictly speaking would not honor their commitments through a moratorium or Failure to Pay event. The PSI was a restructuring event and not a Failure to Pay. We may have an indication on the 8th of May when a coupon is payable on a Samurai bond (Yen bond, XS0071095045, Nov16) but as it is only 2 days after the election and involves only around 4.4million Greece might decide to pay.
Failing to pay the May bond would also cause cross default to most of the other Foreign law bonds and they would become immediately payable (accelerated). With respect to the new Greek bonds and the old ones that the ECB holds it does not matter. They do not have cross-default clauses. Also the bi-lateral loans from Troika would not be affected as they give the option to the loan holder to call a default. The major blow would come from the international point of view and also possibly from the BIT (Bilateral Investment Treaties) that Greece has signed. How can anyone be expected to do business in Greece or invest in Greece when the state has declared a moratorium on certain bond payments? From the Legal point of view, Greece may find it very difficult to conduct business and even normal payments if there are open cases against Greece in English courts. It is a mess and the main argument of those who favour payment or another PSI offer to the hold outs rather than the “Failure to Pay” road.