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.