Andreas Koutras

PSI near OMEGA

2012-03-09T07:15:00.001Z

As quoted on Bloomberg

PSI Results:

152billion out of 177billion of Greek lawEligible bonds tendered or voted yes in the consent solicitation. 9.3billion refused to give consent. This meansthat 16billion did not participate. We do not know how many of the 152billionactually gave only their consent without tendering their bonds.
Of the rest (foreign law, Greek loans) 69% or19.5billion submitted tenders of exchange or consents. Again we do not know thebreakdown
This brings the total tender plus consent to83.5%
Once the CACs are activated the amount couldreach 86.2%-100%. I say could, and I give a range because the Foreign lawsolicitation has been extended to the 23 march and bondholders can change theirmind till then. It also depends on the CAC numbers for each bond. But a likelyfigure would be around 96%

Based on these results Greece inthe statement says that intents to force the remaining 25billion of holdouts. Eurogroupwould decide later today whether to activate the Greek Bondholder’s Act or notand then ISDA would decide if it constitutes a Credit Event that would triggerthe CDS on Greece. Do not forget the activation only applies to the Greek Lawbonds totalling 177billion. So since 152 exchanged then the activation wouldforce 25billion. Out of this 25billion retail investors are thought to bearound 5billion.

The foreign law invitation isextended till the 23^rd of March and presumably bondholders have till2 days before this deadline to submit or amend their votes. Failing that theycan also appear in person at the office of Gotlieb and Stein (for English law)on the assigned date and time to vote (27^th-29^th March).For the CHF bond the meeting is in Zurich.

One more chapter in the Greek debtsaga is nearing its end. The PSI restructuring would be declared a huge successand the markets would rejoice for the next few days as they would not have todeal with Greece for some time. The by far largest restructuring until the nextone is completed. As we pointed out in previous notes, this does not solve theoverall numbers problem in Greece. It gives however, political impetus to theprocess and is a signal that can be done to other countries. Events to follow:

Europe would now have to release the nextportion of the bailout of around 130billion.
Thus we can switch our diet of souvlaki andtzatziki and turn to Portuguese Madeira wine, Irish black pudding and Spanish paellabefore we indulge in an Italian tiramisu. It would be a welcome change.
PM Papademos would call his technocratic premiershipa success since it achieved the main aim of completing the PSI. Most probablyelections would be called for early May. This would be a new risk. The two majorparties need to gather up close to 40% in order to have a coalition government.Currently, they poll around 36%. Even if they do get the required 40+ then theproblem is that not many reform politicians exist in either of them to push thedemands of Troika. Till then enjoy the other peripheral food.

WHAT IF THE PSI SUCCEDS?

2012-03-08T12:29:00.002Z

Forwhatever reason, percentage, CAC or altruistic suicide the PSI succeeds. Whatis the sequence of events that might follow.

1. It is a Germanpower game and Schauble would feel vindicated. He might even think that thesuccess would propel him to the Chancellorship. The mighty Germany finallyruled over the bad markets. However, judging from the German record on bankbankruptcies or bailouts ….) one should be very sceptical about taking financialadvice from them.

2. New bondholdersmight want to hedge their 30Y interest rate risk by paying fixed on a 30Y swap.However, this assumes that Greece would not default before that again. A veryunlikely event given the Greek debt dynamics and economy. Thus many would tryto offload their new Greek bonds as they do not have a mandate for 30Y Greekcredit risk and hedging it would be very expensive. Greek banks would find itvery hard to hedge as this requires 30Y swaplines. Thus they will keep it intheir books and amortise their losses for of the old Greek bonds. Overall,however, we might see some hedging driving the long end higher.

3. Now many holdersof the old Greek bonds had them as an Asset swap. In other words they werepaying the fixed coupon and receiving floating. Now that the bonds woulddisappear they face the choice of either keeping the swap (if they are allowed)or closing it with a loss. If they do close them then we should see asteepening of the curve, first from receiving the 5-10y sector and then payingthe 30y to hedge the new Greek bonds.

4. Markets wouldrejoice the success for a couple of days even with if the CDS is triggered.They are sick and tired of the Greek issues. They can now turn their attentionto the US election, Iran, Oil price, Portugal for the next PSI and the nextrestructuring of Greece.

5. In fact, asuccessful PSI might give the time for Northern European Banks to reduce theirexposure to the rest of the peripheral market in an orderly way.

6. Greece and manyGreeks might feel relieved that their trials are over. They might even thinkthat the bad days are over. They reduced the debt load by 100billion. Did theynot? Well, 30billion would be taken back to pay the 15%, 5.6billion is theaccrued interest and another 23-30 billion (more later, after Blackrock) wouldbe needed to recapitalise Greek banks. Then another 11billion would be neededby the end of the year to pay the immunity of the ECB and further 5-8billionwould be needed to pay interest in the original loans and the deficit. Overallthe Debt/GDP ratio would fall according to Troika from 164% to 163% at the endof 2012. Isn’t that absolutely fab.

7. On the brightside, the cashflow of Greece would improve as now they would only pay 2% (for thefirst 3Y) on 100billion and around 3.5% on the official loans.

8. Greece should beupgraded by the rating agencies by few notches. This would reflect the bettercashflow profile and the support of the EU.

9. A fundamentalrule of debt restructuring is that it should be done once and for all the debt.Otherwise you become a serial defaulter like Argentina. The PSI unfortunatelyfails in this respect. All that this means is that now a new restructuring ison the horizon. That of the official sector. Having demanded an 80% for theprivate bondholders they now can get a 50% for themselves or even less to bringthe Greek debt down to manageable levels.

10. Greece would be free to hold elections now that thejob of PM Papademos is done. He would breathe a sigh of relief that in a coupleof months he would not have to deal with Greek politicians any more.

11. Greece now would not be able to redenominate theirliabilities to Drachma even if they want to. The majority of the Greek debtwould be under English law. This is a double edge sword. Either Greeks would dothe correct and painful reforms or they would suffer even more. If they do notdo them the exit door in few months from now is wide open.

Everybodyis hoping for a successful PSI with or without CACs. The market might get aquick fix before it comes down again and faces reality. Nothing really has beenresolved. Greece now can be dealt with behind closed doors in Brussels.

What if?

2012-03-07T16:57:00.000Z

Reproduced also in IFR

What if questions are never easyto answer but an honourable attempt is better than not asking the question. So:

WHAT IF THE PSI FAILS?

For whatever reason, percentage orlegal the PSI is rejected. What is the sequence of events that might follow.

1.      Let’sstart by apportioning blame. If the PSI fails it would be not because of theGreeks. All the Greek banks and the majority of the Pension funds havesignalled their willingness to tender. If the PSI fails it would be humble piefor Germany not for Greece. Germany is the major driver of this policy. Germanyis responsible for pushing this bad solution to Greece even though theyconceded that it is bad back in October 2011. So if the market fails the PSI itwould be calling Germany’s bluff in a big way. It would not be punishment toGreece.

2.      MarioDraghi is going to come out probably with another trillion of a 10Y LTRO andwould reduce the Regulatory Reserve to zero percent. It would further alter thecollateral rules and accept with no haircut anything that resembles a promiseto pay even from Bernard Madoff. Yet another pie for Bundesbank.
3.      Tothat extend the PSI failure would be a bullish sign rather than a bearish one.
4.      Goldmight go up momentarily as the new printing machine is oiled up.
5.      Mostpolicy makers are promoting the idea that they would let Greece default. Thistime though it would not just be a restructuring event but a Failure to PAY;this is a far more serious offence than restructuring.
6.      Itis odd to see point (4) being talked by Greek politicians. I thought they werethere to save the country not to drive it into suicide. So my guess is thatthey would try to secure another deal by giving earth and water (is an ancientGreek saying that means total unconditional surrender, γῆ καί ὕδωρ) to Troika.
7.      Wouldthe EU and especially France and Germany allow Failure to Pay inside Europewith elections round the corner? If not they need to come up with another planby the 18^th May when the next 8billion mature.
8.      Inthis case they could divert some of the 30billion that are destined for the PSIto pay the March bond. After all 4.6billion is owned by the ECB. Failure to Payalso means failure to pay the ECB.
9.      Theymight even come up with a better plan for Greece and Europe. They might includethe official sector in the haircut which seems to have amnesty. Or even betterthey might sit down and get REAL solution for Europe. A proper fiscal union,not the Mickey Mouse one that lacks democratic accountability and takes Europeback to the dark days.
10. It isactually better to move it further as elections are to be held in early May inGreece and Europe must know whether Greeks would be able to implement thereforms or join the long list of failed states.

So, the threat of disorderlydefault does not seem to hold much weight. It is for this reason that investorsare sceptical about tendering their bonds. Tendering 100 to get back 20 versusa default and recovery of about 20 is not a real threat. It is an incentive tohold out. Happy results.

For the avoidance of doubt

2012-03-07T10:45:00.002Z

Many talk about the 66.67% threshold. From page 22 of the invitation.

The confusion arises because of the bondholder's Act a translation of which can be found here.The crucial difference is that the above snippet refers to the actual Invitation going forward. It annuls the Invitation not the CAC's.

Happy PSI Voting

2012-03-06T16:14:00.000Z

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

In the samespirit I pose the question “Is thereanyone in the world that understands the PSI invitation documentation?”.Because if there is there are thousands of investors, institutional and otherthat would love to hear from him. There are too many questions that remainunclear. What happens to the Japanese bonds/investors? How about non-qualifiedinvestors? What happens if I abstain from voting? Does the Republic have theright to alter the result after the voting by exempting some bonds from thecounting? Is the 75% threshold an absolute one or a soft one that can bechanged simply by a ministerial decision? Which laws does the GreekBondholder’s Act 4050/2012 (introducing CAC) suspend? How about European law?Act 4050/2012 is invoking the “highest public interest” and “Mandatoryprovision” of Article 9 EU593/2008 (see box) which suspends the law applicableto contractual obligations.

In a couple ofdays the PSI offer would be closed, unless of course the Hell.Republic exercisesone of the many rights they have given to themselves and extend the offer forfew more days. Obviously, extending the PSI even for 1 day is not exactly asign of healthy demand for the new Greek bond beauties but may give enough timefor investors to understand exactly what Greece is offering to them. You mayalso have the time toread the un-official translation of the now famous Greek Bondholders Act4050 that retrofitted the CACs.

The Key is the 75% option threshold

There are threebasic scenarios in the invitation:

More than 90% or 185Billion are tendered for theexchange. In this case, the offering states that Hell.Republic would proceedwith the exchange. It leaves the question of activating CAC’s open. In anycase, if they activate them the marginal gain would be small as most of thehold outs are Foreign law bonds and these CACs do not apply (they have theirown)
If more than 75% (154.2billion) but less than90%(185billion) tender for the exchange then the Hell.Republic intents to usethe CAC’s after consulting with Troika. Again, if it is, say 89%, then not muchis gained by activating but if it is 80% then it looks very likely that they wouldforce everyone (apart from the Foreign Law ones).
The third scenario is the really crucial one and is thekey to the whole PSI success or failure. The Invitation states that if lessthan 75% (154.2billion) tender their bonds for exchange and less than 75% givetheir 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 nottendering their bonds but still voting in favour of the activation (probably aCDS holder has interest in doing so).

What if 75% is not reached?
So whatexactly may happen if it is less than 75%. Answering this would give you the answeron how to vote. If the participation is very close to 75% then by kicking somebonds 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 bondscould then be bought in the open market in a separate buying offer (Yes theInvitation caters for such a case). If on the other hand, participation is muchless but still more than the 66 2/3 that is required by Law 4050/2012 (Englishtranslation here) then Hell.Republic may claim that the law overrides theInvitation, they activate the CAC’s and coerce everyone once more.
Now what ifthey cannot do this trick or they are stopped by some higher moral authoritythen what is the sequence of events?

Most Greek policy makers want us to believe thatthis is the end and that Greece would default in a disorderly manner. Greece issaying 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 thispredicament. After all this may be the first time that failure is not 100% theresponsibility of the Greeks. Everyone even the German side admits that the PSIwas and is a bad idea. In this case, Europe would have to give a loan to Greeceto pay the March12 bond and concoct a new and simpler way to reduce the burdenfor 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 thatGreece passes a law making all Greek bonds zero coupon 30Y maturity. Since thePSI collapsed the 177bilion are still under Greek law.
So dependingwhich doomsday scenario you believe you should cast your vote accordingly. Ifin your mind there is no way Europe can let Greece default disorderly despitethe war-words then not tendering may be optimal, especially if you own theMarch12 bond. If you believe that Greece can default and that you will get evenless than what is on offer right now then the optimal is to tender. HAPPYVOTING.

The Swiss bond. Bondholders are getting organised.

2012-03-06T10:40:00.003Z

The Hellenic Republic has made 3 invitations in parallel. One of them concerns the one and only Swiss bond. Issued by the Hellenic Republic and under Swiss law. It seems however that there are many legal constraints and issues with this bond and bondholders are getting organised. Here is their press release:

The Hellenic Republic Swiss Law-Governed Bondholders Invited To Join Ad Hoc Group
CHF 650,000,000 of 2 1/8% Bonds due 2013
ISIN CH0021839524

NEW YORK (MARCH 5, 2012) -- Holders of the 2 1/8% Bonds 2005-2013 of CHF 650,000,000 (the “Bonds”) issued by The Hellenic Republic (the “Republic”) have formed an Ad Hoc Group (the “Group”) in response to the Republic’s recent Solicitation of Consents (the “Solicitation”). The Group’s members hold a material portion of the Bonds. The Group is concerned by the terms proposed in the Solicitation, and the Group is exploring means to address its concerns and to protect the rights of holders of the Bonds. Interested holders of the Bonds are invited to contact the Group before acting on the Solicitation, through the Group’s legal advisor Bingham McCutchen LLP. Given that 8 March is the deadline for submitting a Participation Instruction, holders are urged to contact the Group’s legal advisor quickly.
Contact details are as follows:
Bingham McCutchen LLP
399 Park Avenue
New York NY 10022
Attn: Tim DeSieno
Email: tim.desieno@bingham.com
Tel: +1 212 705 7426

A better tarnslation of Bondholders Act 4050

2012-03-05T16:16:00.003Z

Unofficialtranslation of Bondholders Act 4050/12.

This translationis an improvement of the quick and dirty translation done by Andreas Koutrasand it was done by

Vassilis Sourlas

Please do not rely on this translation for any decision as it is notofficial and may contain many errors, mistakes and misunderstandings. It isdone only for information purposes.

THE PRESIDENT OF THE HELLENIC REPUBLIC

We issue the following law that has beenapproved by the Greek Parliament

Article1

1. For the purposes (application) of this article theconcept of the following termsis as follows:

a) As ‘title (instrument)’is considered a bond, debenture or other title (instrument) of debt, inphysical or dematerialized form (registered or book entry form),governed by Greek law and whose: aa) issuer or guarantoris the Greek State, bb)original duration (maturity) at the time of the first issuanceexceeds twelve months and cc) the issuing date precedes the 31^stDecember 2011.

b) As ‘eligible title (security)’ isconsidered any title (security) specifiedby decision of the council of ministers (Cabinet) and by invitation of the Greek State, as defined in paragraph 2.

c) As ‘outstanding capital’is considered the capital(amount) of the eligible title (security) which has not been paid (redeemed) according to theterms of the eligible title (security) on the date specified bythe invitation, and as ‘aggregate outstanding capital’ is considered the sum of all outstanding capitals(amounts) of all eligible titles (securities) which are defined inthe relevant decision by the council of ministers(Cabinet) and the corresponding invitationof the Greek State, as provided in paragraph 2, with noregard to the series, duration (maturity), interest rate(coupon) or other individual characteristics of the eligible titles(securities).

d) As ‘amendment’ oftitles (securities) is considered the change or addition of terms toone or more ofthe eligible titles (securities) orthe exchange of one or moreof the eligible titles (securities) withone or more new titles(securities).

e) As ‘new title (security)’ isconsidered a bond, debenture, other title (security) oflending (instrument of debt) or guarantee, or financialinstrument, in a physical or dematerialized form (registered or book entry form), or an equivalent of the above for the purpose of applying foreign provisions, that is exchanged for one ormore eligible titles(securities) that are amended. If the new title (security) is a financial instrumentit is accepted to have its performance(return) linked to the GDP.

f) As ‘Bondholder’ is considered the participant who is registered under the System forMonitoring Transactions in Book-entry Securities (the "System") of paragraph 1 of Article 6 of Law2198/1994 (A 43),to the accounts of which, in the system, the eligibletitles (securities) are registered, as it is specified in paragraph 2 of the invitation.

For the titles (securities)that are not monitored by the system,the ‘Bondholder’ is considered as: aa) for the debenture of bearer bonds according to paragraph5 of Article 1 of Law 3156/2003, the bearer ofthe title(security) on thedate specified in the invitation bb) for the debenture with nominal(registered) bonds in paragraph 5of Article 1 of Law 3156/2003, the beneficiary stated in the title (security) and cc) for adebenture of intangible (bookentry form) bonds, the personwho he has been rated a (nominal) certificatein accordance to paragraph 6 ofArticle 1 of Law 3156/2003, on the date specified by the invitation.

g) As the ‘Process Manager’ is considered the Bank of Greece.

h) As ‘investor’ isconsidered: aa) for titles(securities) monitored by theSystem, the investor who has a claim on or underthe title (security) according to theprovisions of paragraphs 2and 4 of Article 6 and Articles 7 and 8of Law 2198/1994 andbb) for titles (securities) that are notmonitored from the System, thebondholder.

i) As ‘participation’ inthe decision-making process of paragraph4 shall be meant exclusively,the positive or negative vote of the Bondholder inthis process, (participating) with a specific amount of outstandingcapital of the eligible titles (securities) he possesses. The invitation ofparagraph 2 determines the specificconditions and means of the participation,which may be done by representation as well (the participation).

2. The Council of Ministers (Cabinet), following the suggestion of the Minister of Finance, decides tolaunch the procedure for amending the eligible titles (securities) held by theBondholders, determines the eligible titles (securities) and upon exchange defines the capital(principal) or nominal amount, the interest rate (coupon) or the yield to maturity, the duration(maturity), the English or other law which will govern the new titles(securities) to be issued by the Greek State and authorizes the PDMA (Public Debt Management Agency) to issueone or more invitations from the Greek State.

The invitation callsthe Bondholders of the eligible titles(securities) specified in it todecide, within a certain timeframe,if they accept the amendment of the eligible titles (securities),as proposed by the Greek State and in accordance to the (described) procedure of this article.

In the invitation are defined inter alia: a) the eligible titles (securities), b) the terms which are proposed to be amended, c)the new content of the terms, d)any new terms, e) upon exchange of the eligible titles (securities),the terms of the new titles (securities),as defined by decision of the Council of Ministers (Cabinet) and their additionalconditions, such as the subdivisionsof the title (security), the graceperiod, the currency (denomination), the terms and meansof payment, repayment and repurchase (buyback), the reasons for termination (events of default), the negative obligations of the issuer (negative pledges), the appointmentrights and obligations of the Bondholders trustee, thecollective action clauses of the new titles, etc. f) the period within which the bondholders of the eligible titles (securities) are required to decide, g)the particular terms and how to participate in the decision-making process.

3. The invitation shall be served to the Process Manager and published onthe Internet as specified herein. The deadline for a decision cannot be lessthan ten (10) days from the date of the publication of the invitation.

4. The Bondholder’s participation in the process is conducted by all orpart of the outstanding capital (principal) of the eligible titles (securities)he possesses, as is defined by the invitation. For the amendment of theeligible titles (securities) is required the participation in the process(quorum) of at least half of the total outstanding capital of all eligibletitles (securities) specified in the invitation ("participatingcapital") and a qualified majority in favor of the amendment of at leasttwo thirds (2/3) of the participating capital.

5. The portion of the outstanding capital of the eligible titles (securities) ofwhom the investor is the Greek Stateor, for eligible titles (securities) that are guaranteed by the Greek State, the portion of the outstanding capital of the eligibletitles (securities) theinvestor of which is theissuer or the guarantor of thetitle (security), is not considered when calculating thetotal outstanding capital, neither for thecalculation of the quorum nor the qualified majority which are stated in paragraph 4.

6. Eligible titles (securities) thatare issued (denominated) in a currencyother than euro, are converted intoeuros according to the exchange rate set by the European Central Bank on the date specified in the invitation.

7. The participationof a Bondholder in the decision-making process of this Article is considered, with regard to the ProcessManager, the Greek State, the PDMA, their assignees, to be performedunder the instructions and with theconsent of the investor. Theabove mentioned shall not be liable to the investor, the Bondholder and any third party ifa Bondholder participated in the process without the consent of theinvestor or in violation of his instructions.

8. The decision of theBondholders is certified by an act of the Process Manager, which ispublished in the same manner as the invitation and is approved by adecision of the Council of Ministers (Cabinet), which ispublished in the Government Gazette.

9. Since the approval decision of the Council of Ministers(Cabinet) is published in the Government Gazette,the decision of the Bondholders, as witnessed by theProcess Manager applies ergaomnes, binds the bondholders andinvestors of the eligible titles (securities) asa whole and prevails any potential contrarylegislation, of any kind, general orspecific provisions of law or regulationissued by the administration or agreement. In the case of exchange of the eligible titles (securities), theeligible titles (securities) that are exchanged, cancel automatically with the registrationin the System of the new titles(securities) and any right orobligation derived therefrom, includingall rights and obligations that at any time formed partof them, extinguish.

10. The issuance ofthe new titles (securities) is conductedupon the decision of the Minister of Financewhich is published in the Official Gazette. Any specific technical issue necessary toimplement the provisions of this Articlemay be adjusted by decision of the Minister of Financewhich is published in the Government Gazette.

11. The provisions of this Article aim to protect the supreme (overriding) public interest, are mandatory rules effective immediately, prevail any contrary legislationof general or special provisionsor regulations issued by the administration oragreements, including the provisionsof law 3156/2003 (A’ 157) and their applicationneither does generate or activate any contractualor statutory right in favor of the bondholders or the investors, nor does it activate any contractual or statutory obligation against the issuer or guarantor of the titles (securities),except for those that are explicitlyreferred to in the provisions of thisArticle.

Article 2

1. In Article 2 of Law3156/2003 (A 157) paragraph 4 is addedas follows:

“4.Terms of debentures,falling within the scope of this law andguaranteed by the Greek State, which prohibit or restrict the assignment or the transfer of the title(security), should not apply to theassignment or the transfer of a title (security) to the Greek State, according to theapplication of the programme for the restructuring of the Greek debt.

2. In Article 12 of the Income TaxCode ratified by Law 2238/1994 (A 151),the new paragraph 15 is added which reads:

"15. When as part of the participation program in the redeployment ofGreek debt, holders of bonds issued by the Greek State or holders of corporatebonds that are guaranteed by the Greek State acquire new bonds of the EuropeanFinancial Stability Fund, for the amount of accrued and unpaid interestattributable to the time of the initial bond exchange, the withholding tax duebecause of discounting the interest (coupon) on the new bonds is conducted atthe end time (maturity) of the new bonds by the intermediary bank. The tax is attributed within the first fifteen days (first half) ofthe following month during which it was withheld with astatement submitted to the competent tax office and in the case that the beneficiary of the interests (coupons) is thebank itself, the bank is obliged to pay the tax due withinthe same period.

The provisions of paragraph 6 of Article 3 of Law 4046/2012(A 28) shall apply accordingly concerning the interest (coupon) ofthis paragraph. "

Article3

The validity of the present law commences from the publication in the Government Gazette, unless it is specified otherwise in the individual provisions.

Greek PSI Titbits

2012-03-05T08:10:00.000Z

Disclaimer: Please do not relyon this note for any decision as it may contain many errors, mistakes and/ormisunderstandings. If you have any questions please contact closingagents@greekbonds.gr or call +44 207 5470341 (Deutsche Bank) or +44 207 9926237 (HSBC)

If you arereminiscent of your school comprehension days then the documents presented bythe Hellenic Republic would be an excellent exercise. It would take more thanfew times reading and re-reading it to get any sense out of it. We tried but wedo not give any warrants, guarantees, representations, acknowledgements orundertakings that we did so correctly and we accept no liability whatsoever forwhatever your actions may be after reading this communication, including butnot limited to, dying of boredom, committing insane acts or simply fallingasleep.

ImportantDates

· Invitation Expires9pm (CET) on Thursday March 8^th 2012.

· Revocationdeadline: 4pm (CET) on Wednesday March 7^th 2012. A holder of Greeklaw bonds has the right to change his mind and revoke his vote by thatdeadline.

· For Foreign lawbonds the revocation deadline is 48hours before the schedule meeting of thebondholders (27-29^th March).

Note1: Custodians may impose stricter limits to thisexpiration date.

Note2: TheRepublic has the right in its sole discretion to: Extend, re-open, amend and/orterminate any invitation in whole or in part with respect to one or more seriesof designated securities.

· Announcement ofresults: This is going to happens as soon as practicable but only if the moneyis on the table by the Eurogroup, the EFSF and the EWG approval (page 10 and 3).

· Bondholder’smeeting for the Foreign law bonds will be held between 27-29^th Marchin Cleary Gotlieb and Steen’s offices in London at intervals of 30min for eachbond.

· Settlement dateis Monday 12^th March for the Greek law bonds and 11^thApril for the Foreign Law bonds.

Invitation

The invitation unfortunately is not written in stone.The Republic has the right to stop the PSI in certain bonds while keepingothers. In particular (page 12 also in 10):

“TheRepublic may, in its sole discretion extend, re-open, amend, waive anycondition of or terminate or modify any settlement Date at any time (subject toapplicable law and as provided in this Invitation Memorandum) with respect toone or more series of Designated Securities”.

In other words the Republic can do pretty muchanything it wants to the offer. This freedom could be of use if the PSI isclose to some threshold number. Suppose for example that out of 200billionbonds only 99billion turn up for the vote. In this case we do not have a quorumfor the amendments. Now imagine a bond series with notional of 3billion where2.9billion did not turn up for the vote. If it is removed then we have 197eligible bonds and 98.9 of votes and presto we have a quorum. This calculation canbe done after the results are known (page 37). In other words the Republic canpretty much do anything it wants and needs.

TheExchange

Depending on the jurisdiction of each bondholder, theRepublic will free you from the burden of having a nominal of 100 Euro of oldbonds and will lighten the load to

1. 31.5 of New GreekBonds under English law

2. 15 of cash ornear cash (EFSF bonds)

3. A GDP warrant

In other words there is a 53.5% haircut on the Nominalof your holdings. But this is not the end of the story. As we said previouslythe 31.5 of new bonds are not worth exactly 31.5%. In fact depending on theexit yield of the Republic (The yield the Republic would be trading after thehaircut) the value of this is between 5% (yield of 22%) and 12% (yield of 12%).The GDP is warrant is pretty worthless as the coupon is capped at 1% and it isa mystery why it was included. A lollipop would have been a better sweetener.So, the overall reduction to your worth (Nominal+NPV) is between 73% and 80%.

Highhaircut kills Participation

The very high haircut (close to 80%) poses in fact amuch more serious problem. It makes bondholders indifferent to the offer andkills all the incentives anyone had or has. The last minute increase in thehaircut was a big mistake by the Greek side or whoever sanctioned it. Thereason is simple. We all know that the European banks would more or lessparticipate due to the high political pressure upon them. Thus the Republicneeds to convince the non-IIF and non-European holders to participate. Most ofthese bondholders have the bonds marked close to 20% or they bought the bondsat around 30 or less. The threat of a disorderly default for them is completelyempty. They do not stand to lose more! If on the other hand the haircut was 70%or less then they could make a profit either by buying them in the market andsubmitting or by revaluing their books. Now there is very little they can do.Not tendering may in fact be their best option available as it has limiteddownside.

TheConsent Solicitation

The Republic also wants your consent to activate Law4050/12 that was passed on the 23Feb but the Republic never bothered to makepublic an English Translation. You can find an unofficial rand rough translationhere.This is only valid for the Greek law bonds. The Republic would need 50% of theeligible bonds (177.309billion) in order to have a quorum and out of these itneeds 2/3 in order for the Republic to have the right to activate the Law’s.Although not exactly clear in Law 4050, activation occurs only if the Councilof Ministers approves the result!

So the maths works as follows:

· For a quorum aminimum 50% of eligible bond is needed. Namely 88.654billion

· For giving theRepublic the right to activate a minimum of 59.103Billion is needed.

It must be obvious that the Republic will most likelyget the requisite number of votes in order to have the right to activate thecoercive exchange. After all it only needs 1/3 of the eligible bonds to betendered for the exchange and Greek banks have close to 50billion.

How youVote?

As a holder of an eligible bond you will have thefollowing options:

A. Tender your bondsfor the exchange in which case you automatically give a YES vote to the Republicto activate Law 4050.

B. Refuse to tenderyour bonds for the exchange but you vote YES to give to the Republic the rightto activate Law 4050.

C. Not Tender yourbonds and vote NO to the Republic’s right to activate Law 4050

D. Ignore the votealtogether.

There is some confusion as to option (D). In otherwords if you do not answer at all is it the same as (C)? If yes then yourabstention is counted in the total as a NO vote. If on the other hand it is notthe same then it means that you are not counted towards the total at all. Myunderstand is that it is NOT the same as in (C) and bondholders who choose toabstain will not be counted towards the total.

Please check with your representative bank, broker, andcustodian as to how they understand this option. Some may take your abstentionas (C) or even something totally different like (A) or (B).

Votingfor Foreign Law bonds. Revocation

For the non-Greek law bonds there would be bondholdermeetings arranged per bond on the 27^th-29^th March.However, during the initial phase (up to 8^th March) a holder of aforeign law bond would have the same voting options as those of the Greek lawbonds (see previous paragraph).

A clarification is needed on the revocation procedurein case of the Foreign Law bonds. On page 6 and 27 it gives 48h whereas on page25 it says that participation instructions are irrevocable. The differenceseems to be (but not very clear) that if you give your consent to theamendments you have till 48hours before the bondholder meeting to revoke yourvote. On the other hand, tendering your bond earlier may in some cases giveirrevocably the right to Acupay to vote for you in favour of the amendments.

As it is not clear whether a holder still has theoption to revoke his participation tender instruction after the 8^thMarch bondholders may find optimal to abstain (unless there is an officialclarification) and just go to the respective meeting to cast their vote.

MinimumParticipation Condition. Bridge Loan and Failure to Pay

Here the document provides for three outcomes. Thepercentages are with respect to the Total amount of 205.6Billion

1. Tenders of 90% or more. In this case theRepublic is obliged to proceed with the offer. It does not say whether theRepublic would in this case exercise the YES consent vote to activate Law 4050.We believe that in this case it would be imprudent to do so as it would hurtmostly retail bondholders for no significant economic gain. The 20billion (10%)that is left out would be mostly the Foreign law bonds (total of 21billionexist) that will not be touched by the Law 4050 anyway. Thus it would hurtdisproportionally small retail holders.

2. Tenders ofbetween 75% and 90%. In this case the Republic would ask the official sector(EU countries, IMF, ECB) whether to proceed with the exchange with or withoutactivateing Law 4050. Furthermore the Republic intents to activate Law 4050 andproceed with the amendments of the Foreign Law bonds if it thinks that morethan 90% would be achieved in such a case.

3. Less than 75%.Here is the tricky part. If the republic receives tenders for less than 75% ofthe total and has not received consent of at least 75% of the total (activateLaw 4050 and also amend the foreign law bonds) then the republic would scrapthe PSI.

Option (3) was meant to be the real scary disincentivefor bondholders. If the collective will did not reach the 75% then the wholedeal is off the table and Greece might disintegrate to a disorderly default. Asexplained earlier, that thought would have been valid if the haircut imposedwas not as big. Now that the haircut approaches the 80% it does not make anyreal difference. Most bondholders are indifferent to such an event as they havepriced/marked their bonds to 20% recovery already. In fact, in this game ofchicken they stand to gain a lot more if the EU gets scared instead andprovides a bridge loan to avert a failure of payment.

If that happens, then the PSI would be scrapped abridge loan of 14.4 billion might be given out of the 30billion that would beavailable by then to pass the 20^th March hurdle. Then a new offer,hopefully a more sensible and easy to understand would be structured. Thealternative of letting a European country declare a moratorium of Failure toPay is not a very attractive prospect even if this country is Greece.

Jamming orDerailing the PSI

As the dates for completing the PSI successfully arevery tight there is still a chance that a bondholder could employ delayingtactics with a view to jam or derail the PSI. Page 23 discusses this and makesthe offer conditional on not having any such legal complication. This seems tobe a credible threat as even a 7 day delay could throw a huge spanner in thePSI works. For example it may take that long a time for a European or Greekcourt to decide that the bondholder’s objection has no merit. By that timehowever, the derailing is done.

GoverningLaw

The governing law of this so called invitation isGreek law, apart from the consent procedure with regards to the Foreign Lawbonds.

RepublicReserves Right to Buy

This is very interesting provision that allows anescape route by the Republic in case something goes right or wrong. TheRepublic reserves the right to purchase any leftover bonds or make a differentoffer to those who refused the first one! The terms of the new offer may not bethe same as the one currently on the table.

This provision may allow for the buying back ofForeign Law bonds. Why would theRepublic do so? Imagine for example that everything goes well with the GreekLaw bonds and the 90% tender participation is reached. Then the Republic maycancel the Foreign Law bondholders meeting that it does not control for fearthat one with a super-majority might cause credit event (Some of these bondsare owned by few foreign investors) and instead offer to buy them out. Or itmay reach 80% (say) and after proceeding with the exchange offer to buy out therest at a different price.

CreditEvent, ISDA and Hell. Railways, Foreign Law Bonds

ISDA was asked to rule recently on whether the ECBswap was a credit event due to the subordination that it effected to the restof the bondholders. That question was bound to fail. A more interestingquestion to ask ISDA would have been:

Does theexchange of ISIN’s between the Republic and the ECB constitute an event ofrestructuring according to the rules of ISDA?

In any case activating Law 4050 would be a creditevent and the CDS would be triggered. So what would happen in this case to theForeign Law bonds? This would very much depend on the terms of each bond. Forexample, sometime ago we posteda note on some of the default clauses of the Hellenic Railways (OSE) bonds.It basically means that some of these bonds are already in default as theRepublic has breached the covenants. Has anyone holding these bonds startedproceedings? We do not know.

So what would happen if bondholders in the Foreign Lawbonds turn down the proposed amendments? Well, unless the Republic chooses togo for the big default; I.e. Failure to pay we believe that it would either paythe bonds or it would try to purchase the bonds or make a new purchase offer.

Unofficial translation of law 4050 that introduced CAC

2012-03-01T10:21:00.000Z

This is a rough translation of Law4050/2012 that introduced the CAC in the Greek Bonds. The law was passed on the23 Feb 2012. Please do not rely on thistranslation for any decision as it is not official and may contain many errors,mistakes and misunderstandings. Only article 1 and 3 is translated.

The President of the Hellenic Republic

We publish thefollowing law which the Greek parliament approved.

Article 1.

1. For the implementation of theprovisions of the present article we define the meaning of the following terms:

a) “title”means a bond, a bond loan or any other loan title, in registered or book entryform which is under Greek law and

1.Issuer orguarantor is the Greek state

2.The original duration at the time of issuance wasmore than12 months

3.The issuing date preceded the 31^stDecember 2011

b) “eligible title” means any title that isdefined by a decision of the council of ministers and in the invitation of theGreek state as defined in paragraph (2).

c) “outstandingprincipal” means the amount of the eligible titles which has not redeemedaccording to the terms of the eligible title on the day which is defined by theinvitation and “aggregate outstandingprincipal” means the sum of the outstanding principals of all the eligibletitles which are defined in the relevant decision of the council of ministersand in the corresponding invitation of the Greek state, as provided inparagraph (2) with no regard to the series, maturity, coupon or any othercharacteristics of the eligible titles.

d) “amendment”means the change or the addition of terms in one or more of the eligible titlesor the exchange of one or more of the eligible titles with one or more newtitles.

e) “newtitle” means a bond or bond loan, or any other loan title or guarantee orfinancial instrument in registered or book entry form or other equivalent ofthe above which is exchanged with one or more eligible titles that are amended.If the new title is a financial instrument, it is allowed to have its returnlinked to the GDP.

f) “bondholder”means anyone registered in the System for Monitoring transactions in Book-entrysecurities (the “System” or BOGS) of paragraph 1 of article 6 pursuant to Law2198/1994 (A 43), where the eligible titles are registered as defined in theparagraph 2 of the invitation.

For the titleswhich are not in the System, “bondholder” means (aa) for a bond loan in bearerform and in accordance with paragraph 5 of article 1 of Law 3156/2003 theholder of the titles at the date as defined in the invitation, (bb) for thebond loan with registered bonds as defined in paragraph 5 of article 1 of Law3156/2003 the owner who is written in the title and (cc) for the bond loan inbook entry form those on which in his behalf there exists proof in accordanceto paragraph 6 of article 1 of Law 3156/2003 on the date of the invitation.

g) “ProcessManager” means the Bank of Greece.

h) “investor”means (aa) for titles registered in the System, the investor who is thebeneficial owner of the title according to paragraph (2) and (4) of article 7and 8 of pursuant to Law 2198/1994 and (bb) for title not registered in thesystem the bondholder.

i) “Participation”in the decision process as in paragraph (4) means exclusively the positive ornegative vote of the bondholder who owns outstanding principal of a eligibletitles. Paragraph (2) of the invitation determines the conditions ofand theways one can participate, which can also be done by proxy.

j) Theministerial council, following the proposal of the Minister of Finance, decidesthe commencement of the process of amendment of the eligible titles by thebondholders, determines the eligible titles and on the exchange it defines thecapital or nominal amount, the coupon or yield, the maturity, the English orother law that will cover the new titles who are going to be issued by theGreek state and appoint PDMA (Public Debt Management Agent ΟΔΔΗΧ) to issueone or more invitation on behalf of the Greek state.

Theinvitation calls the bondholders of the eligible titles that are defined in theinvitation to decide within a certain timeframe to decide if they accept theamendment of the eligible titles as it is proposed by the Greek state and inaccordance with the present article.

Theinvitation defines among others: a) the eligible titles, b)the terms which areto be amended c) the content of the new terms, d) new terms added, e) on theexchange of the eligible titles, the terms of the new titles, as determined bya decision of the council of ministers and in addition terms like minimumdenomination, the grace period, the currency, the means of payment, buyback,events of default, negative pledges, the rights and obligation of the trustees,the collective action clauses of the new titles etc., f) the timeframe in whichthe bondholders of the eligible titles need to decide, g)special terms and theprocess of participation and decision making process.

2. The invitation is published onthe internet as determined therein. The time frame which is determined for thedecision making process cannot be less than 10 day from the date of publicationof the invitation.

3. Bondholder can participate in theprocess with some or all of the eligible titles that they own. For theamendment of the eligible titles a quorum of 50% of the aggregate outstandingcapital of all the eligible titles that are defined in the invitation(“participating Notional”) is demanded and a supermajority of 2/3 of theparticipating notional.

4. The part of the outstandingnotional of the eligible titles in which investor is the Greek state or in thecase of eligible titles that are guaranteed by the Greek State and the part ofthe outstanding notional of eligible titles to which investor is the issuer orguarantor, is not taking into account in the calculation of the quorum or inthe calculation of the supermajority that is defined in paragraph ()

5. Eligible titles that have beenissued in a currency other than the Euro are transformed in Euro using theexchange rate that the ECB has published on the date of the invitation.

6. The participation of a bondholderin the decision making process as regards the present article is considered bythe process manager, the Greek state, PDMA and its appointees to be inaccordance with the direction and the consent of the investor. The abovementioned are not responsible towards the bondholder or any third party if thebondholder participated in the process without the consent of the investor orin defiance of his orders.

7. The decision of the bondholder isapproved by the process manager and is published in the same way as theinvitation and is approved by the council of ministers and published in theofficial government gazette.

8. From the publication of theapproval of the decision by the council of ministers in the official governmentgazette the decision of the bondholders as verified by the process manager isvalid against anyone and bounds the whole of the bondholders and investors inthe eligible titles and supersedes any law general or special or executivedecision or agreement that goes against it. In the case of exchange of theeligible titles and the registration in book entry form of the new titles inthe system, the eligible titles are automatically cancelled and any right orliability that emanated including all rights and liabilities that were part ofthem is cancelled.

9. The issuance of the new titles isdone with a decision of the minister of finance that is published in theofficial government gazette. A decision of the minister of Finance that ispublished in the official government gazette may further regulate anytechnicality that is necessary in the implementation of the present article.

10. The contents of the presentarticle are of the highest public interest and belong to the class ofoverriding mandatory provisions and are of immediate implementation andsupersede any law, general or special, executive decision or agreementincluding Law 3156/2003 (A 157) that opposes it and the implementation does notgenerate or activate any conventional from the law liability against the issueror the guarantor of the titles, apart from those that are explicitly referredin the present article.

Article 3

Thevalidity of the present law commences from the publication in the officialgovernment gazette unless it is determined otherwise in parts of their clauses.

Trading the PSI Invitation

2012-02-29T11:52:00.000Z

The offer to exchange the Greek bonds is under way and the questioneveryone is asking is what is going to happen. Would the hold outs in March 12be paid? Would the Hell.Republic activate the CAC’s or would it proceedvoluntary? What would happen to the Foreign Law bonds?

90% or more? CAC orVoluntary?

The Hell.Republic’s invitation states that if the participation in theoffer is more than 90% then it would proceed with the exchange. It does not sayhowever, whether it would proceed with or without activating the CAC. In otherwords it leaves the room for a possible 10% holdouts.

Let us do a thought experiment (Gedankenexperiment were introduced byEinstein in his Theory of Relativity). Suppose that the 90% is reached. Who arethe 10% holdouts? Well 10% is equivalent to 20.5billion of bonds. A rationalinvestor in order to maximise his chances of holding out would either hold thenear maturities or own the Foreign law bonds.

22billion of Greek bonds maturing in 2012 (noPSI). The other 11billion are owned by the ECB!!
3.1billion out of the 21billion of Foreign lawbonds mature up to and including 2013. From 2014 up to and including 2016 thereare 8.2billion of Foreign law bonds.

I use 2012and 2013 since the probability of Greece doing another “liability exercise”(Official Greek euphemism for default) is very high even after the PSIrestructuring. Out of the 22billion of Greek law bonds my guess is that much ofit is in the hands of Greek banks and Greek pension funds or banks that areamenable to the gentle German pressure. If half of it is in the hands ofholdout investor and retail bondholder then we need no more than 10billion ofForeign law bonds to hold out in order to proceed with the 90% exchange. Wealso know that many of the Foreign law bonds are in the hands of Greek pensionfunds and Greek banks.
In other words,to reach the 90% participation we need to have almost half of the 22billion andalmost all the Foreign law bonds maturing up to and including 2016 to hold out.
Thus thescenario of reaching 90% is something that can be achieved under some softassumptions.

Retail holders
Would theRepublic activate the CAC’s in this case? The CAC’s would only affect the Greeklaw bonds and therefore would push the assumed 10billion of hold outs toparticipate. Out of these 10billion around 5billion are in the hands of retail(Greek residents own around 2.5billion). Thus by activating the CAC’s youpunish disproportionally retail investors and the Greek government hasexpressed its willingness to make good at least the losses to the Greekresidents. Hence why activate the CAC’s if you are going to pay back the gainsat least to some (around 2.5billion). The Republic’s gain is limited comparedto the fuss and possible litigation that is going to create both from non-Greekretail and domestic.

The Foreignlaw bonds on the other hand are not subject to this CAC activation. Bondholderswould be asked to vote in separate meeting that would take place between 24^thand 29^th March (after the famous March bond maturity). If CAC’s areused or if tomorrow ISDA determines that there has been a credit event (CDSpay) then some of the Foreign law bonds would become immediately payable. WouldGreece also go into full blown default with failure to pay? We do not know theanswer to this question and we will not risk a guess.

Can a bondholder cause a credit event?
Here isanother fun part of the process. Assume that the 90% is reached and theHell.Republic decides to keep everything voluntary. It pays the hold outs onthe March 12 (and the ECB which owns 4.6billion). Then it goes to thebondholder’s meeting on the 27^th of March and someone has a majorityof a particular Foreign law bond. This investor however, has a lot more in CDSand it decides to use his majority to pass the Republic’s proposal and thuscause the CDS to trigger even if there was no trigger by the Republic! In thiscase, only the bonds with Cross-default would be affected (New Greek PSI bondsdo not have cross-default). Nevertheless the damage is done. Thus, there aremany games that may be played in the next few days.

Greece reserves the right to buy back
In theoffering, it is explicitly stated that Greece reserves the right in the futureto buy back some of the bonds or to initiate more restructuring offers. This tome points to another option; that of keeping the PSI voluntary if participationis high and trying to buy back some of the bonds left over afterwards in theopen market. If you think about it, it is not such a bad idea. Most of theleftover would still trade at low prices (high yield) and buying them back maybe the optimum solution. In fact buying back the debt at prices lower than46.5% (haircut of 53.5%) reduces the nominal debt of Greece even more!

Prices of Greek Bonds

The majorityof Greek bonds (Greek law) trade in the low 20’s with the March 12 trading ataround 27. Are they cheap or expensive? How much would an investor loose orgain if he buys them now?

Assume thatyou buy a Greek bond at around 20%. Then, whether you tender it to the exchangeor you are CACed into it you will get back (a) 15%, (b) the accrued interestyou paid, (c) a new 30Y Greek bond, (d) a GDP warrant.

The GDPwarrant is almost close to worthless, so assume zero (probably the correctprice is close to 1%). Then the question is: Does the 30Y bond worth more than5% or not. What is the breakeven exityield of Greece to get your money back? The answer is: you need an exit yieldof lower than 22% in order to breakeven and/or make money. Thus, if you thinkthat the Exit Yield of Greece would be lower than 22% then Greek bonds offervalue even if they are forced to the exchange. On top of that you also have theprobability of holding out and waiting to be bought later by the republic orbeing restructured and lose once more.

For the March12 which is trading around 27%, you basically pay 7% premium for the chance toget back 100 on the day. This gives a probability of 10% (premium of 7 to get73) for this to happen. Is this a reasonable number? Who knows? Maybe it ischeap maybe it is very expensive. We shall find out in the next 3 weeks.

Table of all PSI bonds

2012-02-28T15:08:00.001Z

The table before lists all the Greek bonds.Even the ones exempted from the PSI. Apparently the EXEMPT bonds are the ones issued by the Republic in order to finance the purchase of preferred shares in the Greek banks (Thanks to A).

PSI Invitation (Corrections to previous post)

2012-02-28T05:54:00.005Z

Finally theoffer to exchange and amend the Greek bonds was launched. It is a rathercomplicated offer and reading it sometimes feels that its purpose is to confuserather than enlighten the investors into making a decision. If retail ornon-institutional investors try to read it, they would almost certainly suffera stroke. Furthermore, the Invitation cannot be forwarded to interestedbondholders as this is illegal. They interested parties should go to the Greekwebsite (www.greekbonds.gr) tick on allthe disclaimers and download the 166 page document and then make up theirminds. And this has to be done by 9pm CET on 8^th March 2012 (unlessit is extended, terminated or re-opened). I doubt that many retail investorshave the requisite knowledge and time to comprehend this legal document. In anycase retail investors were never consulted during the process.

Designated Bonds, Exchange and CHF

There are three invitationsmemorandums running in parallel:

The main one is called Designated Securities and consists of 197.1Billion of bonds dividedinto three categories:

TheEligible bonds. Greek law bonds.Total of 177.3billion.
TheForeign law Republic bonds. Total of16.9billion
The Foreign Law Guarantee bond. Totalof 2.97billion.
All three categories are alsosolicited for votes in order to amend the Terms and/or introduce CAC’s

The second is called the Exchange Designated securitiesand it consists of bonds totalling 7.9billion.
Finally we have the CHF bond (538million) which issolicited only in order to amend the Terms.

The total amountsof the above three are 205.6billion. Out of these 21.6Billion are under nonGreek (domestic law). This leaves 184billion under Greek law (Note that not allof these are Eligible). Four bonds areexempt from the exchange (total of 7.98billion). They were also exempt in thefirst version of the PSI back in July 2011. We do not know the reasons. Theyare:

GR0326040236	2,716,000,000	Pharmaceutical (Zero)
GR0514017145	3,690,000,000	6M+130bp
GR0514018150	78,300,000	6M+83bp
GR0514019166	1,500,000,000	6M+63bp

Many loans wereincluded from OASA, OSE for a total of 5.8billion. The famous Goldman Sachsswap which is owned by the National Bank of Greece does not seem to be in thelist.
Timeline
The offer wasinitiated on the 24^th February and would terminate on the 8^thMarch. The settlement would be on the 12^th March 2012. The republichas the right to revoke the offer or extend it by 4pm CET 7^th March.
For the foreignlaw bonds the bondholder’s meeting would be on the 24^th-27^thMarch and the settlement on the 11^th April.
Introducing the CAC amendment
Here is the funpart. If you tender your bond to be exchanged then you automatically giveconsent for the amendment.
Greek law bonds (Eligible Bonds)

Ifyou tender your securities for exchange then you automatically vote for the amendment.
Ifyou refuse to tender but participate then you can still vote for the CAC eitherin favour or against.
Ifyou do not vote for the amendment you cannot tender your bonds.
Ifyou do absolutely nothing then you do not tender any bonds and do not give yourconsent for the amendment. In this case you are not counted towards the total.

Blocking:If you participate and tender your securities then they are blocked. This meansthat your bonds cannot be traded during that time whether you tendered or not.

For the amendment to proceed at least 50% of theaggregate principle must vote (in favour or not). My understanding is that inthe case of the Eligible bonds (177.3 Billion, Greek law) this percentageapplies to the whole size. For the amendment to pass then you need 2/3 consentsof these 50% of the 177.3 billion. Namely a minimum of 59.1billion of yesvotes.

Foreign Law

For the Foreign Law Republic andForeign Law Guarantee Bonds there would be meetings per bond to decide the amendments.If a bondholder has tendered his bonds for the exchange then he has also givenhis consent to the amendments. The meeting would be held later on the 24-27March.

Greece Reserves the Right to Activate

In order for the CAC’s to beintroduced to the Eligible bonds, at least 50% of the total aggregate amountmust participate and 2/3 must give consent. If only 88.6 billion (or 50% of the total) participate then only59.1billion of yes votes would be needed. Thus we should expect that the CACwould be introduced almost certainly to the Greek law bonds. Just the Greekdomestic banks and funds holding may be enough to introduce the CAC’s.
Once the amendment has passed thenthe Republic may choose to put them into effect. In other words, it is in theirdiscretion to activate them and force everyone to participate in the exchange.The Republic also seems to have the right to leave out some bonds from thisactivation.

The introduction of the CAC’swould not in itself mean that they are going to be Activated. This issomewhat conflicting if one reads carefully the Greek law 4050/12 which statesthat they are automatically activated. They also mention that this law(4050/12) is not incorporated by reference in this Invitation. (page 4).It is all very confusing and perhaps a clarification is needed here. Nevertheless, the Republic in theInvitation asserts that:

The exchange would proceed if there is 90%participation. i.e more than 185.062Billion. In this case the Republic may ormay not activate the CAC’s. This would leave around 20.5Billion of Hold outs.Many of these would be the Foreign law bonds.
If the participation is between 75% and 90% thenthe Republic may go ahead after consulting the official sector (Germany) toproceed with the offer. It may further activate the CAC to push theparticipation up to 90% or more. Here the Invitation uses the word “intents”.In other words they leave the options open.
If the participation is less than 75% and theconsent on the CAC’s is less than 75% of the total debt then the republic willnot proceed with the PSI.

PSI prospectus is out. (Corrected)

2012-02-27T07:56:00.001Z

Updated version HERE

For those who breath heavily at the sight of the Greek PSI offer the official proposal is out on the www.greekbonds.gr.

After clicking the many disclaimers you come to the point were you can download all the documents in PDF form. We will publish the main points later.Furthermore the Greek Bond Holder Act that defines the "amendments" or the retrofitting of the CAC's can be found here (in Greek, it is the 4050 ΦΕΚ 36 - 23.02.2012 στις 23.02.2012 )

Finally theoffer to exchange and amend the Greek bonds was launched. It is a rathercomplicated offer and reading it sometimes feels that its purpose is to confuserather than enlighten the investors into making a decision. If retail ornon-institutional investors try to read it, they would almost certainly suffera stroke. Furthermore, the Invitation cannot be forwarded to interestedbondholders as this is illegal. They interested parties should go to the Greekwebsite (www.greekbonds.gr) tick on allthe disclaimers and download the 166 page document and then make up theirminds. And this has to be done by 9pm CET on 8^th March 2012 (unlessit is extended, terminated or re-opened). I doubt that many retail investorshave the requisite knowledge and time to comprehend this legal document. In anycase retail investors were never consulted during the process.

Designated Bonds

The total amountsof bonds that will take part in the exercise are 205.6billion. Out of these21.6Billion are under non Greek (domestic law). This leaves 184billion underGreek law. Four bonds are exempt fromthe exchange (total of 7.98billion). They were also exempt in the first versionof the PSI back in July 2011. We do not know the reasons. They are:

GR0326040236	2,716,000,000	Pharmaceutical (Zero)
GR0514017145	3,690,000,000	6M+130bp
GR0514018150	78,300,000	6M+83bp
GR0514019166	1,500,000,000	6M+63bp

Many loans wereincluded from OASA, OSE for a total of 5.8billion. The famous Goldman Sachsswap does which is owned by the National Bank of Greece does not seem to be inthe list.
However, out of the 205.6Billion only 177.309Billion would be considered for the amendment that will introduce the CAC's.
Timeline

The offer wasinitiated on the 24^th February and would terminate on the 8^thMarch. The settlement would be on the 12^th March 2012. The republichas the right to revoke the offer or extend it by 4pm CET 7^th March.
For the foreignlaw bonds the bondholder’s meeting would be on the 24^th-27^thMarch and the settlement on the 11^th April.
Mathematics of CAC’s
Here is the funpart. By choosing to participate in the ~~exercise (with Greek law bonds) whetheryou want to tender your bonds or not~~ exchange you give irrevocable consent to amend thebonds with the proposed CAC’s. In other words:

Greek law bonds

Ifyou tender your securities for exchange then you automatically vote for the CAC.
Ifyou refuse to tender but participate then you can still vote in favour of the amendment to introduce CAC.
Ifyou do not vote for the CAC you cannot submit your bonds.
Ifyou do absolutely nothing then you do not tender any bonds and do not give yourconsent for the CAC. In this case you are not counted towards the CAC’s.

For the foreign law bonds my understanding isthat you have the choice to participate in the tender offer and youautomatically consent to CAC’s being introduced or to vote against theintroduction of the CAC’s and not tender your bonds. In the first case themeeting that is going to take place later in March (24^th-27^thMarch).
Blocking:If you participate your securities are blocked anyway.

CAC’s would be introduced almost certainly
In order for the CAC’s to beintroduced at least 50% of the total aggregate amount must participate and 2/3must give consent. If only 88.65 billion (or 50% of the total 177.3billion) participate then only 59billion are required.Thus we should expect that the CAC would be introduced almost certainly tothe Greek law bonds. Just the Greek domestic banks and funds holding may beenough to introduce the CAC’s. However, later on they say, that if the participation is less than 75%participation the whole thing is abandoned.
Greece Reserves the Right to Activate
The introduction of the CAC’swould not in itself mean that they are going to be Activated. This issomewhat conflicting if one reads carefully the Greek law 4050/12 which statesthat they are automatically activated. They also mention that this law(4050/12) is not incorporated by reference in this Invitation. (page 4).It is all very confusing and perhaps a clarification is needed here.
Nevertheless, the Republic in theInvitation asserts that:

The exchange would proceed if there is 90%participation. i.e more than 185.062Billion. In this case the Republic may ormay not activate the CAC’s. This would leave around 20.5Billion of Holdouts.Many of these would be the Foreign law bonds.
If the participation is between 75% and 90% thenthe Republic may go ahead after consulting the official sector (Germany) toproceed with the offer. It may further activate the CAC to push the participationup to 90% or more. Here the Invitation uses the word “intents”. In other wordsthey leave the options open.
If the participation is less than 75% and the consenton the CAC’s is less than 75% of the total debt then the republic will notproceed with the PSI.

ECB exemption and HoldingsThe ECB and the NCB apparently had56.5billion. Working backwards one can infer how much of each bond the ECB+NCBowned. The table below may not be entirely correct (as it sums to 57billion) butis a good indication of what they bought for the so called Monetary purposes:

Issuer	ISIN	Currency	Coupon	Maturity	Original	ECB Inferred hold	Percentage
Hellenic Republic	GR0110021236	EUR	4.30%	20-Mar-12	14,433,800,000	4,668,187,000	32.3%
Hellenic Republic	GR0124018525	EUR	5.25%	18-May-12	8,000,000,000	3,334,299,000	41.7%
Hellenic Republic	GR0114020457	EUR	4.10%	20-Aug-12	7,719,000,000	3,132,968,000	40.6%
Hellenic Railways	FR0000489676	EUR	4.92%	13-Sep-12	200,000,000	10,000,000	5.0%
Hellenic Republic	GR0508001121	EUR	float	31-Dec-12	45,710,000	22,852,857	50.0%
Hellenic Republic	GR0512001356	EUR	6M+2%	20-Feb-13	5,820,000,000	443,278,000	7.6%
Hellenic Republic	GR0110022242	EUR	4.51%	31-Mar-13	60,710,000	24,281,428	40.0%
Hellenic Railways	XS0165688648	EUR	4.50%	02-Apr-13	430,000,000	17,500,000	4.1%
Hellenic Republic	GR0124021552	EUR	4.60%	20-May-13	9,079,000,000	4,588,434,000	50.5%
Hellenic Republic	GR0128001584	EUR	7.50%	20-May-13	2,497,560,000	1,004,866,421	40.2%
GREECE	XS0372384064	USD	4.63%	25-Jun-13	1,079,136,691	49,869,237	4.6%
Hellenic Republic	GR0124022568	EUR	3.90%	03-Jul-13	410,330,000	84,301,000	20.5%
Hellenic Republic	GR0110023257	EUR	4.43%	31-Jul-13	128,570,000	64,284,284	50.0%
Hellenic Republic	GR0114021463	EUR	4.00%	20-Aug-13	5,850,000,000	2,169,751,000	37.1%
Hellenic Republic	GR0124023574	EUR	4.52	30-Sep-13	299,360,000	150,000,000	50.1%
Hellenic Republic	GR0326043263	EUR	zero	22-Dec-13	1,854,000,000	248,651	0.0%
Hellenic Republic	GR0128002590	EUR	6.50%	11-Jan-14	4,552,000,000	1,853,030,412	40.7%
Hellenic Republic	GR0124024580	EUR	4.50%	20-May-14	8,523,000,000	4,154,347,000	48.7%
GREECE	XS0097596463	EUR	VAR	21-May-14	70,000,000	1,000,000	1.4%
Hellenic Republic	GR0124025595	EUR	4.50%	01-Jul-14	423,970,000	30,003,000	7.1%
Hellenic Republic	GR0112003653	EUR	3.99%	25-Jul-14	207,140,000	51,782,854	25.0%
Hellenic Republic	GR0114022479	EUR	5.50%	20-Aug-14	12,500,000,000	3,958,820,000	31.7%
Hellenic Republic	GR0112004669	EUR	4.11%	30-Sep-14	114,290,000	28,575,713	25.0%
Hellenic Republic	GR0124026601	EUR	3.70%	20-Jul-15	9,585,000,000	3,491,500,000	36.4%
Hellenic Republic	GR0114023485	EUR	6.10%	20-Aug-15	8,000,000,000	3,188,300,000	39.9%
Hellenic Republic	GR0114024491	EUR	3.70%	30-Sep-15	214,290,000	42,861,427	20.0%
Hellenic Republic	GR0124027617	EUR	3.70%	10-Nov-15	424,970,000	50,003,000	11.8%
GREECE	XS0357333029	EUR	FRN	11-Apr-16	5,600,000,000	52,800,000	0.9%
Hellenic Republic	GR0516003606	EUR	VAR	21-May-16	204,350,000	34,056,840	16.7%
Hellenic Republic	GR0124028623	EUR	3.60%	20-Jul-16	7,750,000,000	2,307,593,000	29.8%
Hellenic Republic	GR0116002875	EUR	4.02%	13-Sep-16	171,430,000	28,572,857	16.7%
Hellenic Republic	GR0326038214	EUR	Zero	27-Dec-16	383,740,000	49,400,731	12.9%
Hellenic Republic	GR0118014621	EUR	4.23%	01-Mar-17	400,000,000	57,142,857	14.3%
Hellenic Republic	GR0528002315	EUR	6M+0.09%	04-Apr-17	4,985,000,000	48,000,000	1.0%
Hellenic Republic	GR0118012609	EUR	5.90%	20-Apr-17	5,000,000,000	1,353,800,000	27.1%
Hellenic Republic	GR0518071916	EUR	float	01-Jul-17	83,517,000	11,930,645	14.3%
Hellenic Republic	GR0124029639	EUR	4.30%	20-Jul-17	11,440,000,000	3,877,550,000	33.9%
Hellenic Republic	GR0118013615	EUR	4.68%	09-Oct-17	250,000,000	35,714,286	14.3%
GREECE	XS0260024277	EUR	FRN	05-Jul-18	2,100,000,000	14,000,000	0.7%
Hellenic Republic	GR0124030645	EUR	4.60%	20-Jul-18	7,732,000,000	1,856,239,000	24.0%
GREECE	IT0006527532	EUR	5.00%	11-Mar-19	200,000,000	17,117,000	8.6%
Hellenic Republic	GR0124031650	EUR	6.00%	19-Jul-19	15,500,000,000	3,752,450,000	24.2%
Hellenic Republic	GR0133001140	EUR	6.50%	22-Oct-19	8,192,000,000	2,016,982,997	24.6%
Hellenic Republic	GR0124032666	EUR	6.25%	19-Jun-20	5,000,000,000	1,366,350,000	27.3%
Hellenic Republic	GR0133002155	EUR	5.90%	22-Oct-22	8,930,000,000	1,306,698,000	14.6%
Hellenic Republic	GR0133003161	EUR	4.70%	20-Mar-24	10,462,000,000	1,305,056,000	12.5%
Hellenic Republic	GR0338001531	EUR	2.90%	25-Jul-25	8,648,344,001	63,440,801	0.7%
Hellenic Republic	GR0133004177	EUR	5.30%	20-Mar-26	7,000,000,000	936,706,000	13.4%
Hellenic Republic	GR0338002547	EUR	2.30%	25-Jul-30	8,344,875,000	100,062,350	1.2%
Hellenic Republic	GR0138001673	EUR	4.50%	20-Sep-37	9,000,000,000	132,800,000	1.5%
GREECE	XS0292467775	EUR	2.09%	25-Jul-57	1,779,540,800	1,188,800	0.1%

Radio Interview with John Budden of Sprott Market Insights

2012-02-25T08:33:00.000Z

John Budden presents the Sprott Market Insights in Canada.

Official Greek website

2012-02-24T18:08:00.001Z

The Hellenic republic just created a website for the PSI. Go to www.greekbonds.gr

Europes sleight of hand.

2012-02-24T09:27:00.000Z

***ISIN for the bonds secretly exchanged with the ECB are GR0108008476 and GR0120005161 ***

The Greek parliament voted yesterday the new PSI/CAC law. It is not apretty site for investors or the peripheral bond market. There is no morevoluntarism. The main points are.

Only bonds that were issued before 31Dec 2011would be eligible for the exchange. The Greek government would define, probablylater today which of these would participate in the exchange. It only refers tothe Bonds under Greek law. The rest (around 18billion) would be dealt separatelylater in April as they already have CACs.
As bond holders submit their bonds they wouldalso vote for the exchange. For the exchange to proceed a 50% is needed of allthe outstanding bonds.
Furthermore in order to bind everyone to theexchange, a 66% is needed of those who voted. Thus a minimum 33% of thenotional can bind the rest.
The law is treated as “highest public interest”and as such bondholders have no hope of finding justice in Hell.Republic’scourts. That law supersedes everything (Mandatory provisions). According tosome legal observers this could be unconstitutional. As the law was passed by asimple majority this argument may gather pace. Changes in the constitution needa supermajority of 3/5.
Making the law a “public interest” also meansthat European courts have little power to do much.

The vote isnot just about introducing the CAC into the bonds but also activating themautomatically once the 66% votes for it. In doing so the Hell.Republic istrying to pass the blame with the bondholders for the coercive nature of therestructuring.
So after allthe talk of voluntary participation it comes down to a no-ifs and no-butsrestructuring. Small retailbondholders are caught in the restructuring and are bound to lose theirsavings. The Greek government has expressed its willingness to somehowcompensate the small retail bondholders but only in Greece. No details havebeen published on how this can be done. As for non-domestic retail investors,they would need to lobby their government. For example a German retail investorshould ask Mr Wolfgang Schäuble for compensation.

Market Consequences

The way thePSI was handled by Europe and Greece is atrocious. It started by insisting on avoluntary restructuring. All EU council decisions apart from the last one hadthe word “voluntary” when referring to the PSI. Then it declared that the ECBis a favourite bondholder and took them out of the process in secret. Afterthat it shifted the blame for a coercive restructuring with the bondholders andused extraordinary legal measures to limit the fallout.
They haveshown utter contempt for the market and especially for non-bank investors. Whilethey saved the ECB and threw money to sweeten their Banks the rest of theinvestors are left to bear the brunt of the restructuring. This is surely a badblueprint for future restructurings.

In a previous note, I mentioned that internationalpractice calls for the right of the minority holders to be respected. Contraryto this, the rights of the minority are also restricted by making the law a“public interest”. In addition, when invoking the right of the majority, theprinciple of Good Faith must be observed[1].In other words, one cannot just by having the majority impose a solution thatis unjust and detrimental to some bondholders. And this is exactly the casehere. The majority has the duty to consider the welfare of all the bondholders,not just their own. As it stands, the official sector was bailed out only daysbefore the law was passed and the Greek banks would cover their losses by beingrecapitalised by the issuer. Similar assurances have been given to EuropeanFinancial Institutions by European politicians. We thus have a situation,whereby, certain classes of investors (Official Sector ECB, Greek Banks etc) areindifferent to the restructuring losses. This is by no means a just and equitable burden sharing. It looks andsmells as if their vote has been bought by the issuer.
Moreover, one can argue that there is collusionbetween some investors[2]and the issuer to defraud certain small class of investors by invoking therights of the majority. The law passed effectively only requires a minimum of 33%of the bond Notional to bind everyone.

As we have argued above, some investors escapeunscathed from the restructuring while others take a big hit. This is blatantdiscrimination of investors. Additionally, the official sector (ECB) accordingto press reports was bailed out in total secrecy. This is shameful behaviourand a bad precedence.

We thus expect the market to price the risk of otherperipheral countries restructuring in a similar way and also to price the factthat the ECB is now officially a preferred holder.

BondholderReaction

One shouldnot see the end of the story here. Despite the fact that the law invokes themandatory provisions of Article 9 of EU ~~563~~ 593/2008 many bondholder still have thepower of delaying tactics. For example bondholders can ask courts to rule onthe validity and their answer may take time. If the PSI exercise is delayed bymore than a week then perhaps this would be enough to derail the whole process.The coming weeks look very intriguing.

[1] “Power granted in an indenture to a majority of Bondholdersto bind a minority must be exercised in good faith”. ABA Commentaries onModel Debenture (Sage 99 at US 341)

[2] See, Klein & Juhle, Majority Rules: Non Cash Bidsand the reorganization sale. American Bankruptcy Law Journal, Vol.84,p.297-326.

Is the PSI a done deal?

2012-02-23T10:02:00.000Z

The law for the PSI is being passed by the Greek parliament today. It shifts the blame for the mandatory restructuring to the Bondholders. In other words the Bondholders along with submitting their bonds would also vote to make the deal binding for anyone. This is a rather sinister plan aiming to deflect the blame from the Hellenic Republic.
Challenges
One should expect within the next few hours bondholders to challenge the validity of this law in international and possibly Greek courts. The purpose of this is to delay the onset of the PSI and have at least the near term bonds (March) paid. It is a delaying tactic as we already know the decision of the court. It would either say it is not in his competence or jurisdiction or in the case of a Greek court it would dismiss it immediately. The fun and tears are ahead of us

Did the ECB exchange the GGB in the SMP?

2012-02-23T07:04:00.001Z

Did the ECB get rid of theGGB?
Last week it Die Welt reported that the ECB exchanged (or swapped) theGGB they own in their Securities Market Program (SMP) with new Greek Bondsahead of the PSI. As yet however, there has been no official announcement ofthe exchange or denial of it. Given the fact that nothing has been leaked asyet, I remain sceptical about this exchange and how it was done if it was doneat all. So the question is:

Did the ECB exchanged the Greek bonds or not as yet? There aremany hints that point towards a NO answer:

There was no official announcement and noofficial or unofficial leaked document.
This is a large transaction and it involves theissuance of new Greek Bonds in order for the exchange to take place.
Where are the ISIN’s and the terms of thesebonds? This is particular important as investors need to know the Terms andConditions of the new Bonds to gauge if they, for example, have preferredstatus. If this is the case then they would subordinate everyone else.Investors need to know.
The ECB could not act in such an irresponsibleway. ECB is bound by Market transparency when it comes to transactions.
The PSI was sanctioned by the Eurogroup thisMonday and the Greek parliament is passing the PSI law only today. I doubt ifthe ECB would have done this exchange before the official sanction.
Last but not least is the Greek law that saysthe following (my translation):

1d)As “amendment” of the Bonds, we mean the change of the Terms or the addition newTerms, in of one or more of the chosen Bonds or the exchange of the Bonds with one or more of New Bonds.

Probably thelast sentence refers gives the legal go ahead for the exchange to proceed withthe ECB and not to the real PSI.

This leadsme to guess that the ECB still owns the Greek Bonds but most probably it isgoing to get rid of them in the next 48 hours for the PSI to start. If thatis the case then what is the least problematic way the ECB and Greece can dothis?I suggested thatprobably the ECB would do a Euroclear exchange of the bonds with no transactiontaking place. The reason is clear. The ECB cannot buy directly from Greece any bonds as this is prohibited by article104. Furthermore, they would do two off market transactions with a clearintention of hiding losses and not booking them.

Hence theywould probably opt for the exchange. However this exchange is full of dangers.In conjunction with the intention to pass the profits back to Greece throughthe NCB’s it may be taken as two counterparties doing a transaction with theaim to deprive or defraud other investors. This is how one can look at thistransaction.

A bondholder seeing that the Issuer wasabout to force losses upon the bondholders came to a secret agreement with theissuer. The investor would forgo any profit on the bonds in exchange forimmunity from the restructuring. Furthermore, since she/he is not allowed togive you money directly it would pass the profits to its shareholders asdividends under the understanding that they would pay them back to the issuerusing a variety of other instruments.
Trying topass this from any compliance department in any bank, apart perhaps from theBCCI[1],and you would be thrown out in a millisecond. Yet, this is what is rumoured theECB has done or will do in the coming days.
The simplestand best way to take the ECB out of the PSI is for the ECB to outright sellback its holdings to Greece. The transaction is an OTC one and the high offmarket price paid by Greece can be justified due to the size (20% of theoutstanding debt) and the strategic need of Greece in acquiring this debt.Though not 100% kosher it is by far the solution with the minimum challenges.However, this would require the EFSF to lend Greece the money to do it.Currently, there is no political will to do so.

Lastly, it ispure hypocrisy for the ECB to say that they cannot take losses as this could beseen as monetary financing and at the same time paying dividends with thepublicly expressed intention for this money to be paid back to Greece. This isusually referred as layering a transaction and it is not recommendedunless you have immunity from prosecution.

ECB’s Preferred what exactly?

The Eurogroup in its Monday’s statementpromoted the ECB as a preferred something. Here is the exact text:
“TheEurogroup takes note that the Eurosystem (ECB and NCBs) holdings of Greekgovernment bonds have been held for public policy purposes.”
Here lies a very big issue. The ECB is not apreferred creditor of Greece or any other country. Why? Because it is NOTALLOWED to be a creditor of any country and under any circumstances, no matterwhat (article 104). So it cannot be preferred nothing! I hope they included the NCB holdings by mistake as this would mean that even bonds held for non-monetary policy are included.

The only other option is for the ECB toassume the status of a preferred bondholder! The ECB claims that they boughtthe GGB as part of their monetary policy mandate. Yet, buying bonds outrightwas never in the list of monetary tools to start with and we all know how theytried to avoid this in the first place. Furthermore, as far as I know there isno provision in the bond’s contract that differentiates holders according totheir investment aims and incentives. It is like two customers buying the samecar from the same dealer under the same contract guarantee and when a factoryfault is identified the dealer only reimburses you (because you are a cousin)and not the other. Even car dealers usually do not get away with this.

The Eurogroup is granting the ECB somethingthat either makes no sense (preferred creditor) or something that may haveexceeded the borders legality. Article 9 of EU 563/2008 (on Contractual law)allows for countries to suspend many things in their laws but the ECB is not acountry.

[1] BCCI collapsed in 1991 aftermassive fraud and laundering was “discovered”. CIA and Oliver North(Iran-Contra scandal) had accounts with the bank among other reputable clientslike Noriega, Saddam Husain etc. The actual story dwarfs John Le Carre’simagination.

Greek law on the CAC's. Timeline

2012-02-22T06:23:00.000Z

The law introducing CAC’s retroactively was submittedin the Greek parliament. First the timeline:

The PSI will be launched by the end of this week. i.e. 24 Feb
It will close by the 9th March and the participation plus CAC will be done by then.
The bond swap will be done on th12th March

Withregards to the alteration of the terms of the Greek bonds. The new law submitted to the Greek Parliamentsays:

1) Only bonds issued before 31Dec 2011 are going to be considered for the alteration. This presumably is done in order to exempt the ECB which according to reports swapped their bonds with newly issued in 2012!!!2) For the process to go ahead they need at least 50% of the total outstanding volume.

3) For the alteration of the terms to happenthey need 2/3 of those who voted. So for example if out of 200billion only100billion cast the vote then the process goes ahead. If out of the 100billionwho voted at least 66.67billion vote yes for the alteration then it goes ahead.
4) If (3) IS SUCCESSFUL THEN IT IS MANDATORY FOR THEREST OF THE BONDHOLDERS. NO IFS NO BUTS.
4a) Greece would not activate the CAC but will have the vote do it. In other words there seems to be no voluntary option any more. The bondholders would vote for the deal to become binding for everyone.
5) Greece considers this to be of highest publicimportance ("overriding mandatoryprovisions", "lois d'application immediate/lois de police". This effectively stops the application of contractual European law toGreece on this matters. Bondholders lose right of appeal andhave no recourse. Effectively all those who plan to go to European courts wouldhave a mountain to climb as the Hellenic Republic makes this law above andbeyond Europe’s reach as it claims to be for the public interest.

6) The Greek PDMA (Public Debt management Agency wouldpublish which bonds would become eligible for the alteration later this week

7) The holdings of the Hellenic Republic do not haveright of vote and will not count towards the total. This presumably means theformer SMP holdings which have not been destroyed. We do not know whether theyinclude holdings of the Greek state pension funds or the Bank of Greece.
So the decision of 2/3 of those who participate wouldirrevocably bind everyone. I expect this to create a lot of noise and problemsfor Greece and the bondmarket going forward. If reports of the ECB exit aretrue then this is not just immoral but could become the basis for legal actionas it shows intention to save some investors at the expense of others.

New PSI bonds, ECB SMP NCB and CAC

2012-02-21T15:36:00.000Z

Some of thedetails of the new PSI bonds were published today. Bond holders that tendertheir holdings to the PSI voluntary will get 15% in cash and 31.5% in new bondswith the following terms:
Coupon:

Y1-3: 2.0%
Y4-8: 3.0%
Y9-30: 4.3%
The bond willbe amortized by 5% from Y11 to Y30.

Valuation:Assuming that the exit discount yield is 12% then the value of the package is26.9% while with 9% exit yield this 31.9%. At 5% exit yield the value is 34.5%.

GDP warrants:The securities would also have detachable GDP warrants. We do not know thethresholds but we can assume that they are the ones that the Troika assumed intheir debt analysis. We do not assign great value to these warrants since therate is capped at 1%. The maximum payoff of these warrants has 12% value at 9%exit yield. Thus one cannot assign more than 2-3% present value to thesewarrants.

Legal:
New bonds andwarrants would be under English law with all the bells and whistles likeNegative Pledge, CAC.
Interestinglyboth the EFSF and the bonds would have the same Paying Agent and payments wouldmirror the EFSF loan. I guess this was done in order to avoid paying one andnot another bondholder in the case of a further default.
CAC and ECB
The Eurogroupagreement allows for the non-SMP holdings to pass their profits to the Greekstate by effectively lowering the interest rate payments. If this is so thenthe question arises:

Did theRepublic swap the holdings of the SMP and the holdings of the NCB investmentportfolio?
If they did then this is a gross violation as itimplies some common bondholders were saved even though they did not buy thebonds for “monetary purposes”.
If they did not swap then either they are notgoing to participate in the PSI and the CAC’s will not be activated or theyexpect to suffer a haircut too.

My guess isthat they were swapped and in this case they should expect litigation to fly.

Nanny Mcphee runs Greece

2012-02-21T06:27:00.002Z

Finally thebaby is born and the parents need a good nanny as they are too busy squabblingand fighting with each other. Fortunately, the local Commission had NannyMcphee free. As in the movie her purpose is to teach some (fiscal) discipline,show who is the boss and set the rules in the household.
Eurogroupagreed on the 2^nd Greek bailout/restructuring of Greek debt. Themain points are:

Haircuton the nominal has increased from 50% to 53.5%
Significantlythere is NO mention on a “voluntary” PSI. The word has disappeared from thetext of this Eurogroup pointing to shifting intentions.
Eurogroupaccepts that the ECB and the NCB purchases are held for public policy purposes.The gains may be given to back to Greece. The statement does not saywhether the SMP gains would be passed in the form of a loan or gratis. The NCBgains would however be passed back.
Therewould be closer on-site monitoring by the commission on Greece. In other words,Greece would have Nanny Mcphee for the next few years “…ensuring the timely and fullimplementation of the programme.”
A segregated account where Greece is goingto pay the next quarter’s debt would be created.
A constitutionalchange giving priority of payments to Greek debt. Reactions to thiswould be interesting to watch. I guess that it would not be taken lightly bymany political parties back in Greece.
Eurogroup is aware that more sacrificeswould be needed by the Greek people.
The interest rate would be lowered to 150bpon the Greek Loan Facility
The IMF is expected to make a significantcontribution till 2014

The aim of theexercise is to reduce the Greek debt to 120.5% by 2020 with the Commissionrunning the Greek state (“…strengtheningof Greece’s institutional capacity.”) for the next few years. I remainsceptical if this can really be done efficiently and also if the program cansucceed. However, if the Greeks show an appropriate level of compliance thenEurope promises not to abandon Greece.Eurogroup alsoaccepted the wrong logic that the ECB is a preferred bondholder. The bondmarket may start repricing this risk. This development as we have pointed outbefore is important and it would give rise to many problems and possiblylitigations in the future.

Conclusion
This newbailout although it apparently increases the financial help and sustainabilityof Greece it also increases the political risk of non-compliance andresentment. The greatest fear is that many would see the running of the countryas national humiliation and a rallying point for anti-European forces. In themovie the unruly children start respecting the Nanny and finally accept her asa friend. This is however, a fictional happy ending that has low chances ofsuccess in Greece.

(non)Compliant ECB. SMP and the PSI

2012-02-19T08:17:00.000Z

As ofwriting this Note the ECB-Hellenic Republic swap of the SMP holdings is unconfirmed.However, most market participants think that in one way or another it musthappen in order for the PSI to proceed smoothly.

Mechanics of the swap

Greece issues a new debt series under Greek lawwith new ISIN (Identification numbers) and exchanges these new bonds with thebonds that the ECB owns in the SMP
The new bonds may be identical to the swappedones apart from the ISIN number.
Greece should destroy the old bonds immediately;otherwise the Greek debt has increased by 50billion. Also I am not sure as tothe legal repercussions of holding your own bonds for more than few days orperhaps weeks.
ECB gets repaid and passes the profits to theNCB which in turn they pass it to Greece if they so wish. This would be fun towatch as the NCB’s would participate and incur losses with the bonds they ownin their investment portfolio (estimates of 10billion). One can imagine an NCBmaking losses in their own investment and feeling very reluctant to pass the distributedSMP gains to Greece.
Perhaps the Greek side should demand this onpaper. i.e. if the NCB’s do not return this profit then it is automaticallysubtracted from their country’s loans toGreece.
The intention of returning some of the profitsback to Greece raises some interesting compliance questions (see below).
Could perhaps find a way to do this swap withretail investors too? Who knows.

Compliance Issuesof ECB swap

The exchange according to press reports happened (or isgoing to happen) at par which raises many compliance issues on off-markettransactions. i.e. ECB selling (actually through the NCB’s) something worth inthe market 20 for 100 and the same for Greece. In fact, the ECB is explicitlyprohibited from buying directly from a Government in the Primary market. So howthis could be done? Our conclusion is that they did not do a transaction butjust exchanged the holdings in the Euroclear accounts (the ISINs). This is arather obscure yet powerful trick structurers use.

Effectively the ECB not only did not transact because itcannot but also in order to avoid to write the mark to market loss in their books. They just restructured their debt bypassing the normal procedure. They swappedtheir holdings for something that is worth a lot more and apparently agreed topass the difference back to the issuer. This smells to me like a grossviolation of all the compliance rules Europe and MIFID has introduce. Also bysignifying their intentions of returning the difference to the issuer, this maybe taken as a conspiracy to defraud the rest of the investors. Passing it tothe NCB as shareholders is also very similar to the process of layering atransaction. Compliance departments in banks around Europe should note this. Ifthis is how it happened then the precedence may be excellent defence for themnext time they are restructuring insolvent banks or when banks try to hide ormove losses. On the other hand, perhaps the ECB has thought of this and areready to issue an official exemption.

PSI & CAC’s

According to Greek press reports the offer would be launchedon the 8^th March and would be concluded on the 11^th ofMarch. Here we mean the actual offer not the indication which may begin as earlyas 22^nd February.

We are led to believe that the ECB’s exit is a threat thatCAC’s are imminent. Many report that the law would be passed as early as the 22^ndFebruary, together with the start of the PSI process. This does not mean thatthe CAC’s would be activated however. Again according to press reports theHellenic Exchanges have established an electronic link and platform with thevarious custodians and bondholders would be able to submit their preferencewith security and without knowing what others have done. Furthermore, thiswould be done per ISIN. The voting would also happen within this electronicplatform. Would it be concurrent? In other words once a bondholder expresseshis wish he is also called to vote? What of the retailers? Many unansweredquestions.
We are led to believe that there would be no-mopping up orhoover up law as suggested in the original paper by Buchheit & Gulati[1] but CAC’swould be retrofitted per ISIN. This is interesting and would tie up withreports on an ISIN swap with ECB for the following reason:

The Hellenic Republic now owns 50bor so billion.Would they vote and thus totally rig the voting or not?
In theory they should destroy the bondsimmediately. This would pose the following problem. Suppose that the ECB owned8billion of the 14.4billion of the March12. A group of private holders (or evena single one) with 2.5billion originally had a 17.3% of the issue. Now however withthe destruction of 8billion it owns 39% which may be a blocking minority if theCAC’s threshold is at 66 2/3. Of course this issue becomes more acute forsmaller issues.

Thus the voting is not assuredunless perhaps the threshold is as low as 50% and is done not on the totaloutstanding volume but on the votes cast. In other words if retail investors forexample do not participate they do not count in the voting.

CDS deliverable

One has to assume that the restructuring would be a creditevent and that there would be the need for a deliverable bond. Which one wouldit be? Could it be the newly created ones for the ECB? We doubt this as the ECBwould not participate in the process. Are they going to leave some ISIN’s out?Which ones?

Conclusion

In every way one looks at the whole process the inescapableconclusion is that it would set precedence for future sovereign restructuringsboth on the tools and legalities. The fact that the ECB may be allowed with tricks(some even dodgy) to escape would seriously raise the question of subordinationand of methodology.

[1]How to restructure GreekDebt., Buchheit & Gulati, Draft from: http://ssrn.com/abstract=1603304

Τεχνικές λεπτομέρειες για το «κούρεμα» ομολόγων

2012-02-19T06:55:00.000Z

Read the Article in Kathimerini (in Greek)
or
Οι επόμενες εβδομάδες προβλέπονται ταραχώδεις για την εφαρμογή του PSI. Ο ένας λόγος έχει να κάνει με τα πολιτικά παιχνίδια και ο δεύτερος είναι καθαρά τεχνικός. Οσον αφορά την πολιτική, έχουμε γίνει μάρτυρες μιας συνεχούς παλινδρόμησης στον τρόπο σκέψης, στους στόχους, αλλά και στις επιδιώξεις πολλών ευρωπαϊκών χωρών. Είδαμε μια σκλήρυνση της στάσης πολλών χωρών αμέσως μετά την ψήφιση του νομοσχεδίου. Η αναβολή όμως για τη Δευτέρα, 20 Φεβρουαρίου, των αποφάσεων της Ευρώπης και η συνεχής έγερση νέων αλλά και παλαιότερων απαιτήσεων από μέρους των εταίρων μας δημιουργεί ερωτήματα ως προς τις προθέσεις μερίδας της Ευρώπης. Δεν βοηθά όμως και η υποψία πως από τις εκλογές ενδέχεται να προκύψει μια Βουλή ανίκανη ή ακόμα και εχθρική προς τις αλλαγές.

Για να έχει ευτυχή κατάληξη το PSI, πρέπει να πληρούνται αρκετές προϋποθέσεις:
• Η προσφορά ανταλλαγής των ΟΕΔ (Ομολόγων Ελληνικού Δημοσίου) πρέπει να παραμείνει ανοιχτή για τουλάχιστον 10 εργάσιμες μέρες. Πρέπει οι ομολογιούχοι να αξιολογήσουν την προσφορά και να κρίνουν αν θα μετάσχουν ή όχι. Θα δοθεί επίσης ένα 15% σε βραχυχρόνια ομόλογα του Ευρωπαϊκού Ταμείου Χρηματοπιστωτικής Σταθερότητας (EFSF). Αν και οι αντιπρόσωποι του IIF (Διεθνές Χρηματοπιστωτικό Ινστιτούτο) γνωρίζουν τις λεπτομέρειες, δεν αντιπροσωπεύουν το σύνολο των ομολογιούχων.
• Η δεύτερη προϋπόθεση είναι να υπάρχουν τα χρήματα που αποτελούν το 15%. Η συμφωνία χρηματοδότησης του ΕΤΧΣ πρέπει όμως πρώτα να εγκριθεί από τα Κοινοβούλια των χωρών-μελών. Η Γερμανία έχει προγραμματίσει τη διαδικασία για τις 27 Φεβρουαρίου. Κανένας σώφρων ομολογιούχος δεν θα εκδηλώσει ενδιαφέρον αν δεν είναι τα λεφτά στο τραπέζι. Χρειάζονται επίσης 35 δισ. για να αντικατασταθούν τα ομόλογα που οι τράπεζες έχουν δώσει ως ενέχυρο στην Ευρωπαϊκή Κεντρική Τράπεζα (ΕΚΤ) για απόκτηση ρευστότητας.
Το τελευταίο σημείο είναι πιο πολύπλοκο. Τα περισσότερα ομόλογα έχουν δοθεί από τις τράπεζες ως ενέχυρο στην ΕΚΤ. Θα χρειαστούν λοιπόν 35 δισ. από το ΕΤΧΣ τα οποία θα χρησιμοποιηθούν για να αντικαταστήσουν τα ΟΕΔ που είναι στην ΕΚΤ. Αυτά δεν θα προστεθούν στο χρέος, αφού θα επιστραφούν με το πέρας της διαδικασίας. Ομως η ανταλλαγή μπορεί να χρειαστεί άλλη μία εβδομάδα. Ακόμα λοιπόν και αν η έναρξη της προσφοράς γίνει άμεσα, η ουσιαστική διαδικασία θα αρχίσει την πρώτη εβδομάδα του Μαρτίου. Προσθέτοντας άλλη μία εβδομάδα για την απελευθέρωση των ομολόγων από την ΕΚΤ, φτάνουμε κοντά στις 13-14 Μαρτίου. Ο διακανονισμός για τα καινούργια ομόλογα πρέπει να γίνει μέχρι την παρασκευή 16 Μαρτίου για την πληρωμή στις 20 Μαρτίου. Τα χρονικά περιθώρια είναι πολύ στενά. Αν επίσης χρειαστεί να ενεργοποιηθούν οι ρήτρες συλλογικής δράσης, τότε τα περιθώρια χρόνου στενεύουν περισσότερο. Η σύμβαση του ομόλογου του Μαρτίου προβλέπει περίοδο χάριτος μιας εβδομάδος για την αποπληρωμή κεφαλαίου και ενός μηνός για τους τόκους. Δηλαδή, η αποπληρωμή μπορεί να καθυστερήσει για μία εβδομάδα προτού κηρυχθεί η Ελλάδα σε καθεστώς αθέτησης των όρων (Default).
Η επιτυχία του PSI θα εξαρτηθεί από το ποσοστό συμμετοχής. Είναι λοιπόν υψίστης σημασίας ο απεγκλωβισμός της ΕΚΤ από τα ΟΕΔ. Οσο η ΕΚΤ αρνείται τη συμμετοχή στην εθελοντική διαδικασία τόσο πληθαίνουν οι ομολογιούχοι που ακολουθούν το παράδειγμά της. Με την ΕΚΤ εντός διαδικασίας, αυξάνονται σημαντικά οι πιθανότητες μιας επιτυχούς και εθελοντικής ανταλλαγής χωρίς την ενεργοποίηση ρητρών συλλογικής δράσης. Σε αντίθετη περίπτωση, ο κίνδυνος απόσυρσης της προσφοράς είναι υπαρκτός. Η Ελλάδα μπορεί να αγοράσει τα ομόλογα αυτά με δάνειο από το ΕΤΧΣ σε τιμές κτήσης ή και στην ονομαστική τους αξίας με την προϋπόθεση το κέρδος της ΕΚΤ να επιστραφεί μέσω των εθνικών κεντρικών τραπεζών. Για τους παραπάνω λόγους, η πιθανότητα ενός δανείου «γέφυρα» δεν έχει φύγει από το προσκήνιο. Οποιος και αν είναι ο λόγος, ο κίνδυνος ατυχήματος είναι μεγάλος, έστω και αν μπλοφάρουν κάποιοι. Υπάρχουν όμως πολλοί που προκρίνουν το σενάριο της απομάκρυνσης. Αυτό πρέπει να το κατανοήσουν και οι Ελληνες. Επηρεάζει άμεσα και τη στάση που πρέπει να κρατήσει η ελληνική πλευρά. Για παράδειγμα, δεν θα είναι προς το συμφέρον της Ελλάδος να ωθηθεί σε αθέτηση των όρων μετά το PSI, όταν όλο το χρέος θα έχει περάσει στο αγγλικό δίκαιο. Η Ελλάδα θα πρέπει να συνεχίσει τη διαδικασία ανταλλαγής ομολόγων εάν πιστέψει και έχει πάρει διαβεβαιώσεις ότι η Ευρώπη δεν θα την εγκαταλείψει μετά την ολοκλήρωση της διαδικασίας. Αυτό φυσικά προϋποθέτει τη βούληση των Ελλήνων, των κομμάτων και της κυβέρνησης να κάνει επιτέλους αυτά που έχει υποσχεθεί και έχει έως τώρα αθετήσει.

Report by Die Welt that Greece buys ECB (Updated)

2012-02-16T17:29:00.003Z

According to unconfirmed reports the ECB wouldsell all of its SMP holdings back to Greece at par. You may ask were wouldGreece find the money to do so. Well, Greece can always issue new Greek bonds in lieuof payment and do an exchange through the Euroclear accounts. This is astandard restructuring trick aiming to avoid compliance issues with off markettransactions. But compliance is only for commercial banks not for central banks andgovernments. Or it could get newly issue EFSF bonds to do so but this is harder as it requires approval by the national governments. We do not know the nature of the new bonds but one has to assumethat they would be under ~~English law~~ (reports that they are under Greek law) It may further have covenants like "the bondholder may but is not obliged to call a credit event" (like the bilateral loans under the bailout agreement). Or it may have covenants that effectively make the new bonds senior to any other claim like "the present series of bonds are exempt from any moping up law". The later may be easier done if the new bonds are under English law.The truth is that we do not know the details.
ECB Profits
The ECB may further distribute anyprofits to the NCB which can then do as they wish. the profits come from the coupons they have collected and also from the difference between purchase price and the Par redemption. The ECB has every right to distribute the profits to its shareholders the NCB's. Thus it would be up to the NCB's to return if they wish so the money to Greece. I can imagine that some may do so reluctantly.

Could this debt swap be a disorderly default omen? In other words default is coming and the ECB is jumping the ship? I doubt this very much. If Greece defaults then it would be hard for the ECB to pretend than their holdings are different. Unless of course the ECB gets EFSF bonds and the loss goes to the loan given by the EFSF to Greece i.e. Back to Germany again.
Could that debt swap have to do with the introduction of CAC using a moping up law in Greece? I think this is more likely. If this is the case, then as we said many times before it would be good news for the participation rate, bad news for big institutional investors and possibly good news for retail investors.

Some time ago we presented a proposal for improving the PSI (see, here, here and here,). It involved two stages.

Stage 1. Buy the ECB to reduce the hold out incentives
Stage 2. Offer the option to cash out bondholders alongside the bond swap.

We argued that this would reduce the debt to GDP for Greece to around 100% from day one making it sustainable. If the reports are right Stage 1. is completed. It remains to be seen if Stage 2 would be adopted.

Postponing PSI?

2012-02-16T07:53:00.002Z

The next month is not going to be easy for the faint hearted. There are two basic problems:

Politics
Technical Details

With respect to politics we are witnessing shift in the attitudes of some countries in Europe. Here is a rough timeline:

Greek parliament succumbed to Troika’a demands on Sunday 12th Feb. The idea was to have a Eurogroup on the 15th so for the PSI process to start by the 17th or Monday 20th the latest.
Europe decided to play hard ball and demanded to plug an apparent hole of 325mln in the measures approved. They also demanded written assurances by the main Greek coalition leaders.
Having gotten the letters of compliance from the Greek leaders then the EU proceeded in delaying the Eurogroup decision for Monday the 20th Feb.
Old demands with a new guise are resurfacing, like an escrow account, permanent presence of Troika in Athens (sovereignty issues), Commissar etc.
The delay may mean pushing the PSI after the famous March12 bond redemption

And to top it there may be an election in April which may produce a parliament that would be unable or unwilling to push the reforms. All these add to the uncertainty going forward. It is thus not surprising that as was reported by the Financial Times, legal opinion was taken as to how one can pull back an offer once it has started.

Many claim that the hard stance of Europe signifies a change of heart and that Europe wants Greece out of the Union. If this is true then the optimal course of action for Greece would be to pull back from the PSI and default under Greek law. If on the other hand it is just a bluff then postponing after the election may be optimal.

PSI technicalities matter
The basic problem comes down to what most politicians usually ignore; i.e. details. In order for the PSI to proceed smoothly, certain conditions need to be in place. Briefly the course of events is as follows:

The offer of exchange by the Hellenic Republic needs to be open for at least 10 days in order to gather up interest and for holders to evaluate the offer. So far no details have been released on the particulars of the offer. There is talk of GDP warrants, and 20 different bonds being offered although not as an option. The IIF may know the details but it does not represent all the bondholders.
However, a bond holder cannot rationally be expected to commit his bonds if the EFSF money is not in place. There are two technicalities here.

European parliaments need to approve the package so that the 30billion of the cash component can be in place and
35billion need to be approved to have the buyback of the collateral from the ECB.

The last point is a sticky one. Most GGB’s are used by their holders as collateral with the ECB. In other words they are tied in a repo operation with the central bank. Even pension funds that do not have access to the ECB give them to Banks in order to be used for the repo. Thus for these bonds to be available for an exchange they need to be out of the ECB repo. The deal assumes 35billion as a loan from the EFSF so that these Greek bonds can be replaced with suitable collateral for as long as the exchange lasts.

Hence, it is not just the 30billion of the cash offer but also the 35billion for the collateral swap. EFSF would have to issue these bonds and then the process of exchange must start with the ECB. This could take another week.

Even if the Greek side starts the offer on Tuesday 21st Feb right after a successful Eurogroup then the process cannot start until the German parliament approves of the deal which is on the 27th Feb. Why should a bondholder commit or even reveal his intentions before the money is in place. Thus we have reached the end of February with nothing really in place. The first week of March must be used to free the collateral from the ECB and the second to rush the bond exchange if it is for Greece to meet the obligation on the 20th March. If Greece wants to push CAC’s then the schedule becomes extremely tough.

Bridge Loan
Talk of postponing the PSI has resurfaced once more. As I mentioned earlier there are political and technical reasons. It may be that certain countries have taken the decision to deal with Greece through a disorderly default and exit from Europe or simply that they are playing for more Greek concessions. Bluff or no bluff it increases the risk of an accident which is why some are whispering once more the Bridge loan solution or an escrow account with bond payment as a priority over everything else.

The problem is that Europe is not united on this front either. Some favour default and exit for Greece others bailout and a Commissar. And this also affects the Greek position. For example if the Greek government believes that a default would be pushed after the PSI then it should stop the PSI immediately and default under Greek law. Defaulting after the PSI when all the debt would be under English law is not in the interests of Greece. Greece should proceed with the PSI only if it believes that Europe is going to help and this message is not emitted clearly by the European partners.

Thus postponing the PSI for after the March redemption and after the Greek elections may be an optimal strategy. This of course would mean a bridge loan to cover the march12 redemption. In any case the March12 was covered by the first bailout of 110billion agreed back in May 2010. The financial damage is not as big as it seems. A great portion of the bond (estimates of 8billion) is owned by the ECB which hinted at returning the profit. Thus financially there would be no change there since the deal assumes full payment of the ECB.

European ambivalence

2012-02-15T15:11:00.000Z

It is is crunch timefor Europe. It also crunch time for the ECB and Greece. Time is running out notjust for Greece and the March bond maturity but for Europe too. There areplenty of signs that many European governments are having second thoughts aboutthe PSI and the second rescue package for Greece. This is not entirelysurprising. The attitude of the Greek government was not exactly encouragingfor Europe. Watching the live debate one could not help but despair. Speakerafter speaker, minister after minister spoke of how bad the new MOU is forGreece. They only vote for it to get the money and avoid exit from Europe. Eventhe finance minister Mr Venizelos called it a choice between a bad and somethingworse. It was left to the PM Papademos to carry the burden of defending thepositive aspects of it, which Greece needs to reform in order to survive. Onecan be cynical and say that this is just political posturing and that once theyget re-elected they will follow Troika’s orders. This is not how democracy issupposed to work. This is exactly the kind of attitude that brought Greece tothe brink of collapse. It does not instil confidence to the political system.

As such manyEuropean governments are coming to the conclusion that they should let Greecego.

In order for the PSI to proceed with some degree of success then certainthings must happen:

Parliamentsmust vote for the funds needed to execute the PSI
Europemust relieve ECB from their GGB bonds

Without these twopreconditions in place the PSI would fail. Greece would fail too and pay aheavy price. However, Europe’s ambivalence would be a very bad precedent.Committing 73billion (the loans thus far) and then changing your mind does notenthuse the markets. There is a very tight time schedule and many believe thatthe money would not be in place before the bond swap process begins. If that isthe case then how on earth a bondholder can commit to the swap? Is this why theMarch 2012 bond is finding a new life? Are the markets betting on Greece notgetting the PSI and Europe giving a bridge loan? Maybe.
Many ask thequestion, is the 130billion enough? Can Greece achieve the targets of 120% debtto GDP by 2020? Even if they succeed would that mean another bailout later on?One cannot know the answer to this unless it happens. Truth is that it would bevery hard to achieve these targets unless the reforms kick in fast. Thealternative of not giving the money and producing a failed state in Europehowever is not ideal either. Proponents of this scenario should know thathistory does not move according to plans and conspiracies.
Some time ago weproposed an improved version of the PSI that would give Greece and Europe abetter fighting chance. We proposed that:

Greeceis given a loan to buy out the ECB at COST
Thenadd to the PSI bond swap the option to cash out at around 30cents.

Doing so wouldreduce the Debt/GDP to 100% from day one. Allowing for discrepancies the targetof 120% by 2020 would be easily achievable. It requires though a bold move bythe European leaders and a vision for the future. Instead of a European visionwe get populist and dangerous ideas.
It is not news tosay that anti-European forces are on the rise both in Greece and in othercountries. We also witness anti-Greek feelings to be on the rise. Already wesee the worse kind of yellow press from a variety of Greek and European trashpapers. Germans depicted as Nazi’s and Greeks as lazy pests. The descendants ofJoseph Goebbels are in full swing. Many European leaders are sensing the moodand are silently encouraging it. Europe must put an end to this. It poisonsEurope and endangers the future.

The Choice of Hercules

2012-02-14T18:21:00.001Z

Hercules
For a version in Greek click Ελληνικά

Herculesas the myth goes was the product of the supreme God of Gods Zeus with a mortalwoman Alcmene[1].As such he was himself at least half a God. However, he did not start his lifewith a right foot. He was punished by his mortal step-father to the duty ofherding sheep for the murder of his music teacher Linus. Hercules in his exilestayed with Thespius, who conveniently for Hercules was the father of 50daughters. According to some versions Hercules proceeded into sleeping with allof them in one go[2]but this never made it as the 13^th labour. Thus, Hercules did notstart life as the hero that was to become later. He was easily swayed byearthly pleasures like lovemaking and was also a murderer. Not a typical rolemodel even for those mythical days. What changed him though? Why do most of usremember the labours of Hercules and we have him in such a high esteem? Theanswer comes from Xenophon, who describes (through the sayings of Socrates) “The Choice of Hercules”.

Hercules, Vice and Duty

AntonyGrayling’s book “The choice of Hercules” describes the scene[3] “as Hercules sat watching the herd, a tall,slender woman in a simple white robe approaches him from one side, while fromthe other came a curvaceous young woman in make-up and plunging décolletage.The latter offered Hercules sex, entertainment, and lifelong ease; the formeroffered him struggle and labour…”

Thestory of Hercules bears resemblance to how many Greek people see themselves. Many hold dear the idea of a great nation and people and thinkof themselves slightly above the rest. The “My big fat Greek wedding” moviecaptured some of the underlying themes rather accurately.

Herculeswas blinded by Hera the wife of Zeus, into committing the murder. Why is hebeing punished for the malevolent actions of a higher being that tricked him?Many Greeks feel that they are not responsible for their politician’s actionsand that they, like Hercules, are punished unjustly for someone else’s sins. Theywere tricked and blinded into taking all these debt with the ultimate aim ofcontrolling or acquiring the priceless assets of Greece. Conspiracy theoriesabound in Greece and many politicians of the far left and right see a developingvote market in them.

Continuingwith the story at the cross roads, the choice was between Duty/Virtue, theslender woman (Ἀρετή),or Vice/Pleasure the voluptuouswoman (Εὐδαιμονίαν/Κακία).As Hercules appears in most school books and it is also a children’s tv seriesone is obliged to infer that he chose Duty. Perhaps he was too exhausted withthe 50 daughters of Thespius to contemplate life with Vice.

The choice of Greece

TheGreek people would be called to choose, probably sooner than many anticipatebetween a future inside Europe and one outside. The modern analogues of Vicepromise a brighter debt free and care free Greece outside Europe. They appealto the dark side of misplaced nationalism and pseudo-independence. Virtue onthe other hand has very few things going for her. It is one of the darkestmoments of Greece and people are in despair. Yet the choice must be clear.Greece’s future is inside the European family. There are many things that wemay not like about Europe but one needs to be inside to fight for a moredemocratically accountable, just and equitable European home.

[1]The myth of a God father and mortal mother producing a God-like son apparentlypredates Zeus and the similarities with the Christian faith are notcoincidental.

[2]Based on the highly recommended book of Antony Grayling, The choice of Hercules, 2007

[3] καὶ φανῆναι αὐτῷδύο γυναῖκας προσιέναι μεγάλας, τὴν μὲν ἑτέραν εὐπρεπῆ τε ἰδεῖν καὶ ἐλευθέριονφύσει, κεκοσμημένην τὸ μὲν σῶμα καθαρότητι, τὰ δὲ ὄμματα αἰδοῖ, τὸ δὲ σχῆμασωφροσύνῃ, ἐσθῆτι δὲ λευκῇ, τὴν δ᾽ ἑτέραν τεθραμμένην μὲν εἰς πολυσαρκίαν τε καὶἁπαλότητα, κεκαλλωπισμένην δὲ τὸ μὲν χρῶμα ὥστε λευκοτέραν τε καὶ ἐρυθροτέραντοῦ ὄντος δοκεῖν φαίνεσθαι, τὸ δὲ σχῆμα ὥστε δοκεῖν ὀρθοτέραν τῆς φύσεως εἶναι,τὰ δὲ ὄμματα ἔχειν ἀναπεπταμένα, ἐσθῆτα δὲ ἐξ ἧς ἂν μάλιστα ὥρα διαλάμποι:κατασκοπεῖσθαι δὲ θαμὰ ἑαυτήν, ἐπισκοπεῖν δὲ καὶ εἴ τις ἄλλος αὐτὴν θεᾶται,πολλάκις δὲ καὶ εἰς τὴν ἑαυτῆς σκιὰν ἀποβλέπειν...

Greece and the West. A Failed Act of Union

2012-02-10T16:40:00.002Z

Thedate is July, 5^th 1439. The place is beautiful Florence. The issueis an Act of Union, but not any Union. It is the union of the Greek OrthodoxChurch (East Roman Empire) with the West (Papism). All the Orthodoxrepresentatives are there, from the Emperor John to Russian bishops. PopeEugenius IV is leading the West’s delegation. On the table to be signed is thefollowing “We decree that the Holy Apostolic Throne and Roman Pontiff possess aprimacy over the whole earth, and that this Roman Pontiff is the Successor ofthe blessed Peter, Prince of the Apostles…..” you get the gist.

TheOrthodox delegation needs to sign it. The East Empire is crumpling under theforces of the Ottomans. Unless the West helps soon there would be noConstantinople and no East Christendom no East Roman Empire. All the Orthodoxdelegates sign the decree apart from one, St Mark of Ephesus. The Orthodoxdelegation then went back and changed its mind. They no longer wanted the Westto help if it meant for the Orthodox Church to be under the Pope. They did notwant to be humiliated to the West. They too, had pride and were representativesof God. St Mark plays a pivotal role inthe annulment of the decree through his passionate writings.

Thusthe fate of the East is sealed. The Orthodox leaders decided that it was betterlose the Empire and enslave its people rather than them losing their place and privileges.The rest is, as many say, history. In 1453 Constantinople and the ByzantineEmpire fell and a great new empire was born. Intellectuals, philosophers,professionals, doctors, entrepreneurs left in panic for Venice and Florence.Many attribute the subsequent renaissance to the influx of ideas and learnedintellectuals from the East. The Orthodox Church and the Patriarch inConstantinople retained most of the privileges, possessions, land and money. TheOrthodox Church did not lose much. The people lost, well, everything. It tookmore than four hundred year for the Ottoman Empire to disintegrate (Sick man ofEurope) and the various peoples to be emancipated and new countries likeGreece, Bulgaria, and Romania etc. to be created or re-incarnated.

Greece Belongsto the West

Since1439 the question of whether Greece is or belongs to the West has been a majorpolitical issue for Greek politicians. In the 19^th century few yearsafter the incorporation of the Modern Greek state by the great powers of thetime (mainly Great Britain) the language spoken by the people was “cleaned” ofmost Turkish or Slavic elements in an effort to make it less Eastern. Later acivil war was fought between the communist (representing the East) and the Nationalist(representing Britain and the West). In the 70’s PM K.Karamanlis (uncle of thedisgraced PM 2004-2009) famously exclaimed to A.Papandreou (father of theequally disgraced PM 2009-20011) that “Greecebelongs to the West”. Papandreou was an admirer of the 3^rd wayto socialism professed by Col. Gadhafi. It seems that the question was never reallysettled. Many Greeks live with a romantic ideal of a pure virgin independenceand of a sovereign state that is self-sufficient yet powerful. It is onlythrough the machinations and the conspiracies of foreigners that this God givenright has not materialised.

LA.O.S

Thelatest episode in this aeon long tragedy comes from the Leader of LA.O.S (the“O” in the LA.O.S stands for Orthodoxy). Mr Karatzaferis (leader of LA.O.S) firstsupported the bailout package and Mr Papandreou in May 2010. Moreover, he supportedthe decisions of the EU council in July 2011 and Mr Papademos as a PM. Now, ina complete U-turn, he is not going to vote for the new MOU that he apparentlyagreed only 2 days ago. According to him, signing would be giving upsovereignty. Greece he says has been humiliated. The pride of Greece is notnegotiable and Greek political leaders are dealt with no respect. Furthermore,the IMF representative Mr Poul Thomsen (IMF) is a persona non-grata in Greece. Hefurther lambasted the German boot and called Netherlands, Austria, LuxembourgGerman satellite states.

Thisis typical of the populist nationalistic arguments that aim to stiranti-European and anti-German feelings with the sole purpose to improve thepoll standing. Mr Karatzaferis urged the Greeks to call Mrs Merkel’s bluff,claiming that Germany would never let Greece default as this would bedisastrous for Europe. In fact only last week the leader of the left coalitionMr Tsipras said essentially the same. What if they are wrong? What if insteadof throwing 130billion to the Greek black hole Europe choses instead to ringfence Portugal and Ireland? Merkel would look good in the eyes of the Germanvoters and also look a good European by saving Portugal and Ireland. Greece onthe other hand would do a Lehman Brothers and not a Bear Stearns.

LA.O.Scommands around 16 MP’s in the Greek parliament. The other two main coalitionpartners (ND+PASOK) have 236 seats out of the total of 300. Thus the MOU can bepassed if there are no significant defections from the other two. Despite amajority of 86 it still an open question.

Calling Merkel’sBluff

Greececould in principle default on its obligations. This according to MrKaratzaferis would cause a problem to Europe that Europe cannot afford. It doesnot however say what would happen to Greece if Merkel and Europe decide not tosupport Greece through the default. Let me itemise few consequences:

· Greecestill runs a 2.5% or 5billion primary deficit. In lay terms this means that itwould not be able to pay pensions and salaries. Thus the government may cut orimpose a limit to all salaries and pensions with the rest either owed or in theform of stamps (were done during German occupation).

· Greekbanks are bust. This means bank runs. The government would probably need toimpose limits on transactions over a certain amount. It should further stop anytransfers of money abroad. Imposing capital controls goes against theMaastricht treaty but an emergency law could be passed.

· AsGreece is not self-sufficient (current account balance is -18billion). Greecewould also need to perhaps lock some of the retail deposits to pay foressential goods. Oil-energy is one example were Greece needs hard cash.

· Ultimately,if there is no compliance by the people, Greece might ask to exit the Eurozoneand to regain its monetary policy. Namely, print New Greek Drachmas.

· Asthere is no provision in the Lisbon treaty for Eurozone exit but only for a Unionexit (article 50), Greece would have to leave Europe altogether and thenre-enter to Europe (assuming the let us) under the special provisions thatgovern UK etc.

· Insort Greece would become a truly failed state. I do not dare to think ofgeopolitical consequences for Greece.

Thelist of possible outcomes is longer and it does not get better. Committingsuicide is an act of superior stupidity not a superior trading strategy.

Europewould have problems too if Greece defaults disorderly. However, Europe canabsorb the consequences. Europe would be wounded but not killed. Most Europeanleaders would breathe a sigh of relief if the next European Council meetingdoes not have Greece in the agenda. European banks would suffer a loss but itrepresents a very small amount of their assets. It can be absorbed. The firstbailout money (73bln so far) is under English law and this means that Greececannot change them. This would act as a lever for Greece to comply withEuropean will if Greece ever wants to re-enter the capital markets. Even ifGreece prints new Drachmas the 73bln would remain in Euro.

Thenthere is the fear of contagion into other countries. Portugal in particular isa great fear. However, the 130billion that Merkel saved from Greece could begiven to Portugal who complied (mostly) with the Troika demands. It wouldcompletely seal Portugal from any contagion as their total debt is around170billion. Thus we see that Europe can find ways of continuing without Greecebut Greece does not have meaningful ways of continuing without Europe. Greecedoes belong to Europe.

Conclusion

Thereal question is what the Greek electorate thinks? Many Greek politiciansstarted playing the nationalist-isolationist card. And they play well. Are theirideas catching on like the ideas of St Mark’s in 1439? Because if they do thenGreece’s fate would be sealed once more for many-many years to come in anunpleasant way.

Goingback to 1439, it is chilling how that the Greek Orthodox Church propaganda distilledin the minds of the faithful that it was right to break the links with theWest. It was right because even though they lost everything they had their ownChurch. They would find redemption in the afterlife, with their true God andchurch. Those that did not buy the propaganda immigrated. St Mark became asaint of the Orthodox Church shortly after he died. He is not a saint in theCatholic Church.

Haveno doubts that the same propaganda would be part of the package of “anhonourable death”. Mainly deaths of the others, as the main advocates of thisaction are fully hedged. They own or have on their side most of the mass mediain Greece and can easily manipulate the truth and misrepresent the facts justas the Greek Church did for many centuries.

LSE Panel debate on PSI

2012-02-08T10:05:00.001Z

For all those who could not make it on the 2nd of February to the LSE panel discussion on the PSI. The panellists were:
Dr Jeromin Zettelmeyer, Deputy Chief Economist at the European Bank for Reconstruction and Development and former senior advisor at the Research Department of the IMF
Dr Rodrigo Olivares-Caminal, Lecturer at the Centre for Commercial Law Studies at Queen Mary College, an expert on sovereign debt and insolvency law who has acted as policy expert and consultant to various multilateral institutions and international organisations
Dr Nick Firoozye, Managing Director and Head of European Rates Strategy at Nomura.
Dr Andreas Koutras, Director of ITC Markets, a senior market analyst who has written extensively on the Greek PSI and has put forward a proposal involving a so-called "buy-back option" on the Greek PSI.
The event was chaired by Dr Vassilis Monastiriotisof the LSE.
The presentations are in LSE Hellenic Obervatory.There would also be podcast available soon.

A Bridge (loan) Too Far?

2012-02-07T08:34:00.002Z

Bridge at Arnhem.

InSeptember 1944, the allies had a daring plan. They would try to force an entryinto Germany by overrunning the bridges of the Maas and Rhine River withairborne forces. If successful, the end of the war would be sped up, possiblyto Christmas 1944. Thus the legend of Para Lt Colonel John Frost and the sacrificeat Arnhem was borne. Operation Market Garden as it was named ultimately was afailure. The Hollywood film was not. Incidentally, the film’s title apparently comesfrom Gen. Browning comment “I think we might be going a bridge too far”.

Moral Hazard

Asthe maturity of the March 2012 Greek bond nears, the question is still hanging.Would the EU provide a loan to avoid a disorderly default by a European countryor would it be simply a bridge loan too far? The PSI started its life in July2011 and it was barely three months old before it was scrapped for a newer andmore severe version in October 2011. Tons of cookies (ammunition) have beenconsumed in the meeting rooms and possibly a million air-miles have beenawarded (Distinguish Service) to the Troika and Greek officials. And yet itseems that we are not nearer in producing a viable solution.

Thelatest spat is not between the IIF and Greece with regards to the couponstructure of the new Greek bonds but between the Greek politicians who refuseto implement what they have agreed too and Troika. The logic is simple and itinvolves the moral hazard of reducing ones debt without removing the causes ofproducing it the debt. It is not a secret that the unscrupulous Greekpoliticians are mainly responsible for the mess Greece is in.
For decades, manymismanaged public finances for their personal good or re-election prospects.After all, the money flowed from the equally moronic EU with no strings orsafeguards attached. So here is the main problem. If the debt of Greece ishalved or becomes a minor nuisance while keeping the same policies andpoliticians in power then the risk of a repeat crisis in a few months from nowis great.
The EU is locked into negotiations with a Greek politicalestablishment that regards ignorance, irresponsibility, corruptness, beingincompetent and self-centred as a comparative advantage. To deceive is aquality worth defending. It took the EU a couple of years to figure it out andnow they are asking for pre-PSI written commitments and legislation by theGreek political parties. This is a double whammy for the Greek people who haveno means of escaping either their politicians or the wrath of the EU policies.Many see the EU money as effectively sustaining the same politicians in powerin an analogous way that buying Libyan oil propelled Gaddafi and his regime.

EscrowAccount-Bridge Loan

Inthat respect the latest idea of having an escrow account controlled by the EUthat pays only the maturing bonds could be of use. It is clearly much betterthan the sick and abortion of an idea of a fiscal commissar. How would it work?Simply, the Troika would provide the money with the debt service as a priority.It resurrects the idea of a bridge loan should the PSI talks fail. As it is notcalled a bridge-loan but an escrow account it also semantically bypasses theMerkel comment of no-bridge-loan.

Wouldthis idea be enough to avoid a Greek disintegration or would it be abridge-loan too far? My guess is that unless there is political catharsis inAthens nothing would work. In many ways this is what the EU is trying to do ina clumsy sort of way.
Like in Operation Market garden, the EU badly mismanagedthe bailout and the reaction of the opposition. Papademos the modern John Frostparachuted in and managed to partially dislodge PM Papandreou. However, it hasfew troops. Frost at Arnhem Bridge[1]had 740 when 10,000 were promised. The reinforcement never arrived and after itwas held for double the predicted time of 4 days he surrendered. This could bethe fate of Papademos too. The main reason is that the Greek people are lost,disappointed and bewildered. Their political parties and system are incapableof making the transition to civilization but are more than capable at survivingthe attack. Hope is dying fast in Greeceand desperation is taking its place. Greece like Germany in 1944 may have towait for another year until the regime collapses amid the total destruction. Until then Europe would be throwing goodmoney after bad, or as in Arnhem good men to their death.

[1]The bridge war renamed to John Frost bridge in 1978. Frost published two autobiographies "A Drop Too Many" and "Nearly There".