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Forget other European countries trying to jump on the collateral bandwagon. There’s an even better reason why Greece’s collateral deal with Finland won’t work.According to FT Alphaville, a negative pledge clause in existing bond legal documents actually prohibits the collateralization of bailout loans without doing the same for other, foreign-law bonds.
The owners of the bonds do have the right to waive the clause, but in any practical scenario this would be unlikely. German business newspaper Handelsblatt wrote that “Greece could get a wave of lawsuits from private creditors” should any collateral deal go through.
If Greece failed to provide collateral against these bonds as well as EFSF loans, these bonds would be in default.
FT Alphaville thinks there might still be a way to get collateral to work without activating the negative pledge clause. If the European Financial Stability Facility (EFSF) lent directly to an outside agency in charge of the collateral, policymakers might be able to get around this paperwork.
But, we’ve pointed out before, providing collateral even just to EFSF lenders could leave Greece with fewer funds than it needs to stay afloat. This situation does not bode well for the viability of the Greek bailout.