Friday 6 January 2012

Alternative Proposal within the Framework of PSI that is beneficial to Europe, Bondholders, ECB and Greece

Sustainable Solution for Europe and Greece

The “official” punishment of the Bondholders is not in the interest of Europe and is not in beneficial to Greece. Markets punish more efficiently and faster.
The restructuring of the Greek debt should aim at: 
  1. Exit Yield. The yield that Greek bonds would be trading after the restructuring 
  2. The exit rating. The rating of Greek debt after the restructuring. 
  3. Sustainability of the Greek finances after the restructuring
·         In its current form the PSI+ does not fulfil these three essential aims. Either because the bondholders demand high coupons or because there are many hold outs risking the voluntary participation rate.
·         Greece would need to borrow again to pay the coupons of the new bonds as it is still runs a primary deficit of 2%. Paying on average a 5% coupon would require another 3% of GDP.
·         Adding the request that the new bonds to be under English law and the exclusion of the ECB from this process complicates and endangers its success.
Current PSI+

·         Voluntary exchange of bonds with new ones that have half the nominal amount
·         According to press reports the new bonds would have an average coupon of 5%
·         New bonds would probably be under English law
·         The new bonds would be collateralised so as to provide capital guarantee at maturity (through a Zero Coupon issued by the EFSF)
·         Part can be repaid in cash. Up to 15%
·         Greece would need from day one to service the new bonds
·         ECB and the official sector would not take part in the PSI exchange.

Greek Debt 
·         There are close to 260 billion of Greek bonds (including 2057). See Annex at the end of the presentation).  8billion were excluded from the original PSI.
·         Around 45billion are on the balance sheet of the ECB
·         Greek financial institutions own around 60billion
·         The rest are in European FI and foreign bondholders
·         It is estimated that around 10-15billion are in the hands of retail investors
·         Currently most of the Greek bonds are trading between 20-40% with most maturities after 2014 being closer to 20%
·         This gives rise to the possibility of a voluntary buyback option within the PSI framework.

Alternative PSI option
The low market price of the GGB’s (20-40%) makes the “voluntary buyback” a real alternative option within the PSI framework.
·            Greece offers a cash option of around 30-35% (indicative and negotiable) to buyback and destroy the bonds. It also offers a buyback price towards the official sector (ECB). In particular:
·            ECB sells its holdings at 70% (official sector). Cost of 31billion
·            Greece pays 35% for the rest. Assuming 15% holdouts the cost is 61 billion
·            Hold outs would cost another 31billion (Free riders, retail investors, Vulture funds).
·            In total 123billion would be spend to retire and destroy 260billion.The debt of Greece would be reduced by 127billion (estimate)

Advantages for Greece

·            Greece cleans up the majority of its bond stock. Greek debt to GDP drops to less than 120% from day one. Not in 2020.
·            As these loans have a 10Y grace period the:
·            Greece’s exit rating should be high as the outstanding debt is reduced.
·            Sustainability of Greek finances is improved as there are no immediate coupons to pay.
·            The risk of activating some of the moratorium clauses present in the Hell.Railway bonds and of causing a Credit event is minimized.
·            Greece would start paying these loans in 10Y at 3.5% making further NPV gains compared to the 5% demanded by investors.
·            Avoids the introduction of English law in new bonds (only official loans). Also minimizes the risk of lengthy and costly litigations.
·            A firm backstop is introduced for 10 years. It would give the necessary time for the much needed economic reforms to work.
·            Most importantly it would reverse the extremely bad investment environment and halt the depression both in the economy and in society.
Advantages for Bondholders

·            Most European banks have marked their holdings close to 50% after the EU council decisions. They have already taken the hit.
·            Currently bondholders are asked to take a further NPV loss of possibly 10% with the new Greek Bonds making the total loss close to 60%.
·            They also risk being restructured again if Greece’s finance deteriorate further.
·            They extend their credit and interest rate exposure to Greece for 30Y
o   On the other hand with the cash buyback option:
o   Bondholders limit their losses. No risk of being restructured again.
o   Bondholders avoid having to risk manage the “new” Greek credit risk.
o   Bondholders no longer need to manage the market risk for 30Y.
o   No need for Regulatory charges or other provisions due to the 30Y new Greek bonds.

Advantages for Europe

·            The proposal operates within the framework agreed by the EU council. i.e. Voluntary restructuring and avoiding default. No need for a new decision.
·            It further punishes the reckless investors much harsher as the real haircut is 65% (or more if agreed).
·            ECB does not go bankrupt because of the GGB holdings. The buyback price can be structured so as to limit the losses.
·            The voluntary character of the solutions allows the possibility of differential pricing.
·            Europe does no need to worry about the financing needs of Greece for 10Y
·            Europe implements a market solution for the debt rather than one dictated.
·            Europe avoids the costly consequences of a Greek default. Whether an orderly or a disorderly default occurs, Europe would pay a much higher price to keep the EU united.
·            Europe still has leveraged on Greece through the Stability Pact and the funding of the Greek banks.
·            Europe can also demand strict conditionality for the funding of the buyback to proceed.
Funding of the Proposal
·            It is clear that Greece does not have the funds for such a buyback. It is also clear however, that it does not have the funds to pay coupons in the new Bonds should the PSI proceed in its current form. Trying to raise it immediately from taxes would exasperate the deep economic recession.
·            The maximum funds needed of around 126billion could be raised in principle by the EFSF and/or IMF or using bilateral country loans over the course of a year.
·            Once the bondholders commit to the scheme, the bonds are transferred into a trust or other vehicle and bondholders are repaid as money is raised. Bondholders are also compensated for the waiting time.
·            Greece would most probably be placed on Selective default until an agreement is reached. This is the same status that Greece would be placed if the PSI goes ahead.
Dealing with the Hold Outs.

·            Obviously, for the proposal to work a high participation is needed. And this is also true for the original PSI.
·            It would be imprudent to assume 100% participation and the current proposal assumes a 15% hold outs.
·            This is achieved by altering the incentives for the hold outs.
·            One of the major problem of the current PSI proposal is the existence of a large Holdout, the ECB. This allows Free Riders to join on the back of the ECB and the official sector.
·            By taking the ECB out with a cash offer, bondholders would think twice of being alone after the conclusion of the buyback. Only the hard core investors would risk holding out.
·            The cash price of 30-35% is very close to where many FI’s have marked their holdings making it very appealing and also close to where a the recovery could be should Greece default. This makes the offer very appealing.

Appendix. Greek Bond

Issuer ISIN Currency Coupon Maturity Size Approx. Size in Eur Size MINFIN Type Orig. PSI List
Hellenic Republic GR0124019531 EUR 2.00% 11-Jan-12 16,040,000 16,040,000 Yes
Hellenic Republic GR0110021236 EUR 4.30% 20-Mar-12 14,435,000,000 14,400,000,000 14,433,800,000 Yes
GREECE XS0147393861 EUR FRN 15-May-12 450,000,000 450,000,000 450,000,000 Yes
Hellenic Republic GR0124018525 EUR 5.25% 18-May-12 8,000,000,000 8,000,000,000 8,000,000,000 Yes
Hellenic Republic GR0124020547 EUR 20-Jun-12 413,700,000 413,700,000 Yes
Hellenic Republic GR0106003792 EUR 1.00% 30-Jun-12 139,430,000 139,430,000 Yes
Hellenic Republic GR0114020457 EUR 4.10% 20-Aug-12 7,700,000,000 7,700,000,000 7,719,000,000 Yes
Hellenic Railways FR0000489676 EUR 4.92% 13-Sep-12 200,000,000 200,000,000 200,000,000 Yes
Hellenic Railways XS0208636091 EUR 3.56% 21-Dec-12 250,000,000 250,000,000 250,000,000 Yes
Hellenic Republic GR0326042257 EUR zero 22-Dec-12 2,012,000,000 pharma Yes
Hellenic Republic GR0508001121 EUR float  31-Dec-12 45,710,000 Sinkable Yes
Hellenic Republic GR0512001356 EUR 6M+2% 20-Feb-13 5,820,000,000 5,820,000,000 Yes
Hellenic Republic GR0110022242 EUR 4.51% 31-Mar-13 60,710,000 60,710,000 Yes
Hellenic Railways XS0165688648 EUR 4.50% 02-Apr-13 430,000,000 430,000,000 430,000,000 Yes
Hellenic Republic GR0326040236 EUR zero 19-Apr-13 2,716,000,000 Pharma no
Hellenic Republic GR0124021552 EUR 4.60% 20-May-13 9,100,000,000 9,100,000,000 9,079,000,000 Yes
Hellenic Republic GR0124021552 EUR 7.50% 20-May-13 2,497,560,000 2,497,560,000 Yes
GREECE XS0372384064 USD 4.63% 25-Jun-13 1,500,000,000 1,079,136,691 1,079,136,691 Yes
Hellenic Republic GR0124022568 EUR 3.90% 03-Jul-13 410,330,000 410,330,000 Yes
GREECE CH0021839524 CHF 2.13% 05-Jul-13 650,000,000 532,786,885 532,786,885 Yes
Hellenic Republic GR0110023257 EUR 4.43% 31-Jul-13 128,570,000 Sinkable Yes
Hellenic Republic GR0114021463 EUR 4.00% 20-Aug-13 5,800,000,000 5,800,000,000 5,850,000,000 Yes
Hellenic Republic GR0124023574 EUR 4.52 30-Sep-13 299,360,000 299,360,000 Yes
Hellenic Republic GR0326043263 EUR zero 22-Dec-13 1,854,000,000 pharma Yes
Hellenic Republic GR0128002590 EUR 6.50% 11-Jan-14 4,600,000,000 4,600,000,000 4,552,000,000 Yes
Hellenic Railways XS0142390904 EUR 5.46% 30-Jan-14 197,000,000 197,000,000 197,000,000 Yes
Hellenic Republic GR0124024580 EUR 4.50% 20-May-14 8,500,000,000 8,500,000,000 8,523,000,000 Yes
Hellenic Republic GR0514017145 EUR 6M+1.3% 21-May-14 3,690,000,000 3,690,000,000 no
GREECE XS0097596463 EUR VAR 21-May-14 70,000,000 70,000,000 70,000,000 Yes
Hellenic Republic GR0124025595 EUR 4.50% 01-Jul-14 423,970,000 423,970,000 Yes
Hellenic Republic GR0514018150 EUR 6M+0.83% 23-Jul-14 78,300,000 78,300,000 no
Hellenic Republic GR0112003653 EUR 3.99% 25-Jul-14 207,140,000 Sinkable Yes
Hellenic Republic GR0514019166 EUR 6M+0.63% 10-Aug-14 1,500,000,000 1,500,000,000 no
Hellenic Republic GR0114022479 EUR 5.50% 20-Aug-14 12,500,000,000 12,500,000,000 12,500,000,000 Yes
Hellenic Republic GR0112004669 EUR 4.11% 30-Sep-14 114,290,000 Sinkable Yes
Hellenic Republic GR0514020172 EUR var 04-Feb-15 2,020,000,000 2,020,000,000 Yes
Hellenic Railways JP530005AR32 JPY 7.35% 03-Mar-15 10,000,000,000 95,238,095 95,238,095 Yes
GREECE JP530000CR76 JPY 5.80% 14-Jul-15 20,000,000,000 190,476,190 190,476,190 Yes
Hellenic Republic GR0124026601 EUR 3.70% 20-Jul-15 9,600,000,000 9,600,000,000 9,585,000,000 Yes
Hellenic Republic GR0114023485 EUR 6.10% 20-Aug-15 8,000,000,000 8,000,000,000 8,000,000,000 Yes
Hellenic Railways GR1150003 EUR 5.73% 28-Aug-15 700,000,000 700,000,000 700,000,000 no
Hellenic Republic GR0114024491 EUR 3.70% 30-Sep-15 214,290,000 Sinkable Yes
Hellenic Railways FR0010027557 EUR 4.68% 29-Oct-15 200,000,000 200,000,000 200,000,000 Yes
Hellenic Republic GR0124027617 EUR 3.70% 10-Nov-15 424,970,000 424,970,000 Yes
GREECE JP530000BS19 JPY 5.25% 01-Feb-16 30,000,000,000 285,714,286 285,714,286 Yes
GREECE XS0165956672 EUR 4.59% 08-Apr-16 400,000,000 400,000,000 400,000,000 Yes
GREECE XS0357333029 EUR FRN 11-Apr-16 5,600,000,000 5,600,000,000 5,600,000,000 Yes
Hellenic Republic GR0516003606 EUR VAR 21-May-16 204,350,000 204,350,000 Yes
Hellenic Railways XS0193324380 EUR FRN 24-May-16 250,000,000 250,000,000 250,000,000 Yes
Hellenic Republic GR0124028623 EUR 3.60% 20-Jul-16 7,700,000,000 7,700,000,000 7,750,000,000 Yes
GREECE JP530000CS83 JPY 5.00% 22-Aug-16 40,000,000,000 380,952,381 380,952,381 Yes
Hellenic Republic GR0116002875 EUR 4.02% 13-Sep-16 171,430,000 171,430,000 171,430,000 Yes
GREECE XS0071095045 JPY 4.50% 08-Nov-16 40,000,000,000 380,952,381 380,952,381 Yes
Hellenic Railways JP530005ASC0 JPY 4.50% 06-Dec-16 8,700,000,000 82,857,143 82,857,143 Yes
Hellenic Republic GR0326038214 EUR Zero 27-Dec-16 383,740,000 383,740,000 pharma Yes
Hellenic Republic GR0118014621 EUR 4.23% 01-Mar-17 400,000,000 Sinkable Yes
Hellenic Railways XS0215169706 EUR 4.03% 17-Mar-17 450,000,000 450,000,000 450,000,000 Yes
Hellenic Republic GR0528002315 EUR 6M+0.09% 04-Apr-17 4,985,000,000 4,985,000,000 Yes
Hellenic Republic GR0118012609 EUR 5.90% 20-Apr-17 5,000,000,000 5,000,000,000 5,000,000,000 Yes
Hellenic Republic GR0518072922 EUR float  01-Jul-17 83,520,000 Sinkable Yes
Hellenic Republic GR0518071916 EUR float  01-Jul-17 415,500,000 Sinkable Yes
GREECE XS0078057725 JPY 4.50% 03-Jul-17 30,000,000,000 285,714,286 285,714,286 Yes
Hellenic Republic GR124029639 EUR 4.30% 20-Jul-17 11,400,000,000 11,400,000,000 11,440,000,000 Yes
GREECE XS0079012166 JPY 3.80% 08-Aug-17 50,000,000,000 476,190,476 476,190,476 Yes
Hellenic Republic GR0118013615 EUR 4.68% 09-Oct-17 250,000,000 Sinkable Yes
Hellenic Railways XS0160208772 EUR 5.01% 27-Dec-17 165,000,000 165,000,000 165,000,000 Yes
Hellenic Republic GR0120003141 EUR 4.59% 03-Apr-18 444,000,000 Sinkable Yes
GREECE XS0260024277 EUR FRN 05-Jul-18 2,100,000,000 2,100,000,000 2,100,000,000 Yes
Hellenic Republic GR0124030645 EUR 4.60% 20-Jul-18 7,700,000,000 7,700,000,000 7,732,000,000 Yes
GREECE XS0286916027 EUR VAR 22-Feb-19 280,000,000 280,000,000 280,000,000 Yes
Hellenic Republic GR0122002737 EUR 5.01% 27-Feb-19 112,000,000 Sinkable Yes
Hellenic Republic GR0122003743 EUR 5.96% 04-Mar-19 425,000,000 Sinkable Yes
GREECE IT0006527532 EUR 5.00% 11-Mar-19 200,000,000 200,000,000 200,000,000 Yes
GREECE XS0097010440 JPY 3.00% 30-Apr-19 25,000,000,000 238,095,238 238,095,238 Yes
GREECE XS0097598329 EUR VAR 03-Jun-19 110,000,000 110,000,000 110,000,000 Yes
Hellenic Republic GR0124031650 EUR 6.00% 19-Jul-19 15,500,000,000 15,500,000,000 15,500,000,000 Yes
Hellenic Republic GR0120002135 EUR 5.16% 17-Sep-19 350,000,000 Sinkable Yes
Hellenic Republic GR0133001140 EUR 6.50% 22-Oct-19 8,200,000,000 8,200,000,000 8,192,000,000 Yes
Hellenic Railways XS0280601658 EUR 4.22% 20-Dec-19 255,000,000 255,000,000 255,000,000 Yes
Hellenic Republic GR0124032666 EUR 6.25% 19-Jun-20 5,000,000,000 5,000,000,000 5,000,000,000 Yes
GREECE XS0224227313 EUR VAR 13-Jul-20 250,000,000 250,000,000 250,000,000 Yes
GREECE XS0255739350 EUR VAR 31-May-21 100,000,000 100,000,000 100,000,000
GREECE XS0256563429 EUR VAR 09-Jun-21 100,000,000 100,000,000 100,000,000
Hellenic Republic GR0133002155 EUR 5.90% 22-Oct-22 8,900,000,000 8,900,000,000 8,930,000,000
Hellenic Republic GR0133003161 EUR 4.70% 20-Mar-24 10,400,000,000 10,400,000,000 10,462,000,000
Hellenic Republic GR0338001531 EUR 2.90% 25-Jul-25 7,200,000,000 7,200,000,000 7,200,000,000 Inflation
Hellenic Republic GR0133004177 EUR 5.30% 20-Mar-26 7,000,000,000 7,000,000,000 7,000,000,000
GREECE XS0260349492 EUR VAR 10-Jul-26 130,000,000 130,000,000 130,000,000
GREECE XS0110307930 EUR 6.14% 14-Apr-28 200,000,000 200,000,000 200,000,000
Hellenic Republic GR0338002547 EUR 2.30% 25-Jul-30 7,500,000,000 7,500,000,000 7,500,000,000 Inflation
GREECE XS0192416617 EUR float  10-May-34 1,000,000,000 1,000,000,000 1,000,000,000
GREECE XS0191352847 EUR 5.20% 17-Jul-34 1,000,000,000 1,000,000,000 1,000,000,000
Hellenic Railways GR1150002 EUR 5.07% 14-Jun-37 800,490,000 800,490,000 800,490,000
Hellenic Republic GR0138001673 EUR 4.50% 20-Sep-37 9,000,000,000 9,000,000,000 9,000,000,000
Hellenic Republic GR0138002689 EUR 4.60% 20-Sep-40 7,900,000,000 7,900,000,000 7,920,000,000
GREECE XS0292467775 EUR 2.09% 25-Jul-57 600,000,000 600,000,000 600,000,000 Inflation