Thursday 16 February 2012

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.

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.