Wednesday 29 February 2012

Trading the PSI Invitation

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

90% or more? CAC or Voluntary?

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

Tuesday 28 February 2012

Table of all PSI bonds

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)

Finally the offer to exchange and amend the Greek bonds was launched. It is a rather complicated offer and reading it sometimes feels that its purpose is to confuse rather than enlighten the investors into making a decision. If retail or non-institutional investors try to read it, they would almost certainly suffer a stroke. Furthermore, the Invitation cannot be forwarded to interested bondholders as this is illegal. They interested parties should go to the Greek website ( tick on all the disclaimers and download the 166 page document and then make up their minds. And this has to be done by 9pm CET on 8th March 2012 (unless it is extended, terminated or re-opened). I doubt that many retail investors have the requisite knowledge and time to comprehend this legal document. In any case retail investors were never consulted during the process. 

Designated Bonds, Exchange and CHF
There are three invitations memorandums running in parallel:
  1. The main one is called Designated Securities and consists of 197.1Billion of bonds divided into three categories:
    • The Eligible bonds. Greek law bonds. Total of 177.3billion.       
    • The Foreign law Republic bonds. Total of 16.9billion      
    •  The Foreign Law Guarantee bond. Total of 2.97billion.
    • All three categories are also solicited for votes in order to amend the Terms and/or introduce CAC’s
  2. The second is called the Exchange Designated securities and it consists of bonds totalling 7.9billion.
  3. Finally we have the CHF bond (538million) which is solicited only in order to amend the Terms.

Monday 27 February 2012

PSI prospectus is out. (Corrected)

Updated version HERE

For those who breath heavily at the sight of the Greek PSI offer the official proposal is out on the 
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 )

Friday 24 February 2012

Official Greek website

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

Europes sleight of hand.

***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 a pretty site for investors or the peripheral bond market. There is no more voluntarism. The main points are. 
  •  Only bonds that were issued before 31Dec 2011 would be eligible for the exchange. The Greek government would define, probably later today which of these would participate in the exchange. It only refers to the Bonds under Greek law. The rest (around 18billion) would be dealt separately later in April as they already have CACs.
  • As bond holders submit their bonds they would also vote for the exchange. For the exchange to proceed a 50% is needed of all the outstanding bonds.
  • Furthermore in order to bind everyone to the exchange, a 66% is needed of those who voted. Thus a minimum 33% of the notional 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’s courts. That law supersedes everything (Mandatory provisions). According to some legal observers this could be unconstitutional. As the law was passed by a simple majority this argument may gather pace. Changes in the constitution need a supermajority of 3/5. 
  •  Making the law a “public interest” also means that European courts have little power to do much.

Thursday 23 February 2012

Is the PSI a done deal?

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.
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?

Did the ECB get rid of the GGB?
Last week it Die Welt reported that the ECB exchanged (or swapped) the GGB they own in their Securities Market Program (SMP) with new Greek Bonds ahead of the PSI. As yet however, there has been no official announcement of the exchange or denial of it. Given the fact that nothing has been leaked as yet, I remain sceptical about this exchange and how it was done if it was done at all. So the question is:
Did the ECB exchanged the Greek bonds or not as yet? There are many hints that point towards a NO answer:

Wednesday 22 February 2012

Greek law on the CAC's. Timeline

The law introducing CAC’s retroactively was submitted in 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 
With regards to the alteration of the terms of the Greek bonds.  The new law submitted to the Greek Parliament says:

Tuesday 21 February 2012

New PSI bonds, ECB SMP NCB and CAC

Some of the details of the new PSI bonds were published today. Bond holders that tender their holdings to the PSI voluntary will get 15% in cash and 31.5% in new bonds with the following terms:
  • Y1-3: 2.0%
  • Y4-8: 3.0%
  • Y9-30: 4.3%
  • The bond will be amortized by 5% from Y11 to Y30.
Valuation: Assuming that the exit discount yield is 12% then the value of the package is 26.9% while with 9% exit yield this 31.9%. At 5% exit yield the value is 34.5%.

Nanny Mcphee runs Greece

Finally the baby is born and the parents need a good nanny as they are too busy squabbling and fighting with each other. Fortunately, the local Commission had Nanny Mcphee 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.
Eurogroup agreed on the 2nd Greek bailout/restructuring of Greek debt. The main points are:

Sunday 19 February 2012

(non)Compliant ECB. SMP and the PSI

As of writing 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 must happen in order for the PSI to proceed smoothly.
Mechanics of the swap
  • Greece issues a new debt series under Greek law with new ISIN (Identification numbers) and exchanges these new bonds with the bonds that the ECB owns in the SMP
  • The new bonds may be identical to the swapped ones 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 to the legal repercussions of holding your own bonds for more than few days or perhaps weeks. 
  •  ECB gets repaid and passes the profits to the NCB which in turn they pass it to Greece if they so wish. This would be fun to watch as the NCB’s would participate and incur losses with the bonds they own in their investment portfolio (estimates of 10billion). One can imagine an NCB making losses in their own investment and feeling very reluctant to pass the distributed SMP gains to Greece. 
  •  Perhaps the Greek side should demand this on paper. i.e. if the NCB’s do not return this profit then it is automatically subtracted from their country’s  loans to Greece. 
  •  The intention of returning some of the profits back to Greece raises some interesting compliance questions (see below). 
  •  Could perhaps find a way to do this swap with retail investors too? Who knows.

Τεχνικές λεπτομέρειες για το «κούρεμα» ομολόγων

Read the Article in Kathimerini (in Greek)
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.

Thursday 16 February 2012

Report by Die Welt that Greece buys ECB (Updated)

According to unconfirmed reports the ECB would sell all of its SMP holdings back to Greece at par. You may ask were would Greece find the money to do so. Well, Greece can always issue new Greek bonds in lieu of payment and do an exchange through the Euroclear accounts. This is a standard restructuring trick aiming to avoid compliance issues with off market transactions. But compliance is only for commercial banks not for central banks and governments. 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 assume that 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 any profits 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?

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.

Wednesday 15 February 2012

European ambivalence

It is is crunch time for Europe. It also crunch time for the ECB and Greece. Time is running out not just for Greece and the March bond maturity but for Europe too. There are plenty of signs that many European governments are having second thoughts about the PSI and the second rescue package for Greece. This is not entirely surprising. The attitude of the Greek government was not exactly encouraging for Europe. Watching the live debate one could not help but despair. Speaker after speaker, minister after minister spoke of how bad the new MOU is for Greece. They only vote for it to get the money and avoid exit from Europe. Even the finance minister Mr Venizelos called it a choice between a bad and something worse. It was left to the PM Papademos to carry the burden of defending the positive aspects of it, which Greece needs to reform in order to survive. One can be cynical and say that this is just political posturing and that once they get re-elected they will follow Troika’s orders. This is not how democracy is supposed to work. This is exactly the kind of attitude that brought Greece to the brink of collapse. It does not instil confidence to the political system. 
As such many European governments are coming to the conclusion that they should let Greece go. 

Tuesday 14 February 2012

The Choice of Hercules

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

Friday 10 February 2012

Greece and the West. A Failed Act of Union

The date is July, 5th 1439. The place is beautiful Florence. The issue is an Act of Union, but not any Union. It is the union of the Greek Orthodox Church (East Roman Empire) with the West (Papism). All the Orthodox representatives are there, from the Emperor John to Russian bishops. Pope Eugenius IV is leading the West’s delegation. On the table to be signed is the following “We decree that the Holy Apostolic Throne and Roman Pontiff possess a primacy over the whole earth, and that this Roman Pontiff is the Successor of the blessed Peter, Prince of the Apostles…..” you get the gist. 

Wednesday 8 February 2012

LSE Panel debate on PSI

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.

Tuesday 7 February 2012

A Bridge (loan) Too Far?

Bridge at Arnhem.
In September 1944, the allies had a daring plan. They would try to force an entry into Germany by overrunning the bridges of the Maas and Rhine River with airborne forces. If successful, the end of the war would be sped up, possibly to Christmas 1944. Thus the legend of Para Lt Colonel John Frost and the sacrifice at Arnhem was borne. Operation Market Garden as it was named ultimately was a failure. The Hollywood film was not. Incidentally, the film’s title apparently comes from Gen. Browning comment “I think we might be going a bridge too far”.

Thursday 2 February 2012

Can Greece reform itself? Can Germany and Europe help?

Many of us have pondered how is it possible for Greece to have missed most if not all the targets that were set by the Troika? How incompetent can they be? Why is it that after two years with Greece on the brink of oblivion the Greek politicians still play games and refuse to implement what they signed up to? How difficult is it to reform the Greek economy? What can Germany do?
German Experience
Let me attempt to answer using my personal experience. Back in the late 1990’s I found myself as a postdoctoral fellow in Germany with the Max Planck Gesellschaft. It was in the city of Jena (Thuringia) of the former East Germany. Jena is famous for the Carl Zeiss optics and also for the battle (1806) that subjugated Prussia to the French empire (Napoleon) which in turn gave its name to a Paris Metro station. When the German unification (or takeover) happened Jena changed drastically. More than 20,000 people working at the Carl Zeiss Jenoptik factory were fired and in a city of 100,000 it meant misery. Unemployment soared and political extremist was rife. Despite the resources thrown by Germany, Thuringia was still a Least Favourite Region 7 years (EEC classification) after the “change”.  Incidentally, the whole of Greece was classified as a Least Favourite region for most of the 80-90’s. At work even after 6 years you could divide your colleagues into two groups. Those that embraced the new order of things and those that chose to resist and live in the past. It was not an age division but rather a cultural and a character differentiation. Sometimes the more enthusiastic proponents of change were of the older generation. My professor was in charge of reading the Staatssicherheit files (Stasi) and making sure that people who did serious harm were put aside. Although many “politicians” that were entangled with the old regime conveniently reformed themselves to survive, many were side-lined or forced to early retirement. Slowly the 2-stroke Trabants were replaced by the Audi’s vorsprung durch technik. It took many years and the enormous resources of West Germany to make the change. Germany run deficits of up to 13.2% and threw more than ½ the total savings of West Germany to subsidise the East. Europe also help by first endorsing the unification and also financial even unwittingly. The result in Europe was the collapse of the Exchange Rate Mechanism through the rapid appreciation of the DM caused by the increase in interest rates. Effectively, the rest of Europe paid for the unification efforts of Germany through the devaluations.
I mentioned East Germany because there are many parallels with Greece. Although Greece was on the other side of the Iron Curtain (Churchill 1946), the economic policies for many years were little different. Greece had and still has a state run economy. Decades of state mismanagement has created not only a state monster but also generations of politicians and people who learned to accept and navigate this labyrinth as was the case in GDR. Many of the ones with a conscience that refused to accept corruption, political oppression and nepotism as a way of life left the country. Contrary to East Germany there was no wall to stop them. As a result the forces of healthy change were weakened. Politicians were voted in on the promise of favours or job allocations. No one cared about prudent policies or good governance. In addition, the EEC (later EU) subsidies provided the requisite money with few if any strings attached (remember COMECON). Politicians used these subsidies in order to get re-elected. There was no need to change anything! Thus, Greece started exhibiting many of the characteristics of a failed state. The bureaucracy failed and together Greece failed.
The EU woke up to the problem rather late and it demanded from Greece to change all this in space of few months. However, none of the politicians or the political parties that are heavily responsible for this mess has been removed, reformed or changed. The analogy with Germany is trying to change Ostdeutschland into West Germany by keeping Eric Honecker and its party fully in control of the implementation. It cannot happen.
I am not trying to excuse Greece or the Greeks from their responsibility. Greece needs help from Europe in order to reform, not just financial assistance. They need to change their memes (cultural genes) and this takes time. The money that Troika is pledging to Greece is seen by many as way to propel and support a corrupt political system. After all, the Greek cabinet is little changed from two years ago. Strict conditionality should be placed on the politicians. Perhaps the EU could help by encouraging the current PM to form a new political party to cover the middle ground that is now disintegrating. Not doing so would push ordinary Greeks to the extreme left and right. This is not in the benefit of Europe.
Please excuse my exaggerated and possibly dramatic analogy (being Greek I cannot help it) with East Germany. East Germans suffered hard and long and many generations paid a high price in terms of lost potential, lost aspirations and lost lives. We should try to avoid a repeat of this bad movie.
Greece needs more than financial help. It needs a dream and a hope. Many East Germans dreamt and hoped of the day their country and families would be united. What are the Greeks dreaming about? More taxes? What are the aspirations of the young unemployed Greeks? Immigrating? The Greek political establishment in power for the last 30y has failed and needs to be swept aside. Europe is more than just an economic union. It is an ideal fostered and hammered through many centuries and many bloody wars. Now is the time for the European ideal to take the driving seat.

Wednesday 1 February 2012

Countdown to PSI’s Paradox

The Greek FM Mr Venizelos announced that the PSI talks are close to completion. This is not the first time. On numerous occasions a PSI deal was announced as imminent. This reminds me of Zeno’s Paradox. Every day we run half the distance to the PSI completion, but we never get there. There is however a deadline that many see as immovable, the 20th March 2012. This is the date that the GGB4.3% needs to be repaid, all 14.4billion of it. Working backwards from that date, we have the following tentative schedule:
·         Around one week may be needed to administer and settle the new Greek PSI Bonds. Even this may be optimistic. Also the funds need to be disbursed by the EZ.
·         Once the PSI is finalised, there should be at least two weeks for the offer and to gather up any interest.
So, assuming everything goes to plan and participation is very high, the PSI would need to be in place by the end of February (Friday 24th of February).
If on the other hand, it does not go according to plan and participation is low, then a decision needs to be taken on whether to introduce and activate CAC’s.  Greece could in principle pass the law any time in the next 7 days or by the 10th of February  (Friday). But activating the CAC also requires a meeting of the bondholders with the necessary majority. This may actually take another week. So, if there is a need for coercive restructuring the PSI must at least be done before the 17th February. In the case of a coercive restructuring followed by a credit event, the EZ must have in place contingency plans for possible contagion. The next 3Y LTRO is on the 29th February (Leap year) and it may fall right in the middle of the PSI messy offer.

Timing wise, this is a rather restrictive schedule as it leaves very little room for errors or unforeseen events. Markets should be prepared for a rough ride in the next few weeks.