Friday, 12 July 2013

Greek Bonds. Value or Junk?

Greek Bonds. Value or junk?
The European periphery bond markets have suffered a lot with the adventures of the Portuguese government. Investors tend to dump periphery bonds en masse without examining the finer details. Let me explain what I mean. Greece is in the final stages of its fiscal adjustment. In 2014 it would most probably post a primary surplus. Furthermore Greece has done its PSI. Bonds have been haircut by more than 75% (in NPV terms). By contrast neither Portugal nor any other southern country is anywhere near addressing their debt imbalances. Their PSI’s are ahead, whereas the Greek one is behind. Moreover, Greece would largely complete the recapitalization of its banks in the next few days and although they are far from pinnacles of health they too are in their closing cycles. By contrast, banks in Spain, Portugal or Italy are at the beginning of the process.
Then there are also the technicalities of the Greek bonds.
·         The majority of the Greek debt (except the ECB holdings) is under English law and thus cannot be restructured by simple act of parliament. By contrast, the majority of bonds from other countries is under local law and thus amenable to “voluntarily restructure, roll over or change”.
·         The new Greek bonds have, cross default
·         Pari Passu with EFSF loans
·         Sovereign immunity waiver
·         Negative pledge
·         Tax gross up
In other words, the Greek bonds are much safer than most other periphery bonds. But there are also some trading technicalities that should be noted.