For
whatever reason, percentage, CAC or altruistic suicide the PSI succeeds. What
is the sequence of events that might follow.
1.
It is a German
power game and Schauble would feel vindicated. He might even think that the
success would propel him to the Chancellorship. The mighty Germany finally
ruled over the bad markets. However, judging from the German record on bank
bankruptcies or bailouts ….) one should be very sceptical about taking financial
advice from them.
2.
New bondholders
might 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 very
unlikely event given the Greek debt dynamics and economy. Thus many would try
to offload their new Greek bonds as they do not have a mandate for 30Y Greek
credit risk and hedging it would be very expensive. Greek banks would find it
very hard to hedge as this requires 30Y swaplines. Thus they will keep it in
their 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 holders
of the old Greek bonds had them as an Asset swap. In other words they were
paying the fixed coupon and receiving floating. Now that the bonds would
disappear 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 a
steepening of the curve, first from receiving the 5-10y sector and then paying
the 30y to hedge the new Greek bonds.
4.
Markets would
rejoice 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 attention
to the US election, Iran, Oil price, Portugal for the next PSI and the next
restructuring of Greece.
5.
In fact, a
successful PSI might give the time for Northern European Banks to reduce their
exposure to the rest of the peripheral market in an orderly way.
6.
Greece and many
Greeks might feel relieved that their trials are over. They might even think
that the bad days are over. They reduced the debt load by 100billion. Did they
not? Well, 30billion would be taken back to pay the 15%, 5.6billion is the
accrued interest and another 23-30 billion (more later, after Blackrock) would
be needed to recapitalise Greek banks. Then another 11billion would be needed
by the end of the year to pay the immunity of the ECB and further 5-8billion
would be needed to pay interest in the original loans and the deficit. Overall
the Debt/GDP ratio would fall according to Troika from 164% to 163% at the end
of 2012. Isn’t that absolutely fab.
7.
On the bright
side, the cashflow of Greece would improve as now they would only pay 2% (for the
first 3Y) on 100billion and around 3.5% on the official loans.
8.
Greece should be
upgraded by the rating agencies by few notches. This would reflect the better
cashflow profile and the support of the EU.
9.
A fundamental
rule 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 unfortunately
fails in this respect. All that this means is that now a new restructuring is
on the horizon. That of the official sector. Having demanded an 80% for the
private bondholders they now can get a 50% for themselves or even less to bring
the Greek debt down to manageable levels.
10. Greece would be free to hold elections now that the
job of PM Papademos is done. He would breathe a sigh of relief that in a couple
of months he would not have to deal with Greek politicians any more.
11. Greece now would not be able to redenominate their
liabilities to Drachma even if they want to. The majority of the Greek debt
would be under English law. This is a double edge sword. Either Greeks would do
the correct and painful reforms or they would suffer even more. If they do not
do them the exit door in few months from now is wide open.
Everybody
is hoping for a successful PSI with or without CACs. The market might get a
quick fix before it comes down again and faces reality. Nothing really has been
resolved. Greece now can be dealt with behind closed doors in Brussels.
