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The ECB is reportedly swapping its Greek bonds for bonds of an identical structure and nominal value to avoid taking losses if Athens chooses to impose involuntary losses on bondholders, according to Bloomberg.How would the ECB dodge the losses?
At the heart of the matter is a piece of fine print in the bond agreements called ‘collective action clauses’ (CACs).
Here’s how UBS’s Art Cashin described CACs in this morning’s Cashin’s Comments:
[CAC] in laymen’s terms means that if a majority of the bonds held, agree to a change of terms, all the other bondholders are bound by the altered terms.
What does this have anything to do with the rumoured ECB debt swap? Cashin explains:
The tipoff is that the new bonds, to be swapped for the current bonds, will have no collective action clauses. So, if the new bonds are issued in time, the ECB will not be bound by the haircut that private holders may “agree” to. (Hat tip – Chris Walker, UBS)
This seemingly attractive deal that the ECB would get also risks creating the perception of two-tier credit market, which could discourage investment.
More On the CACs
The discussion of CACs doesn’t end with the ECB wanting to avoid them. Should the CACs ever be used by the existing bondholders, an estimated $3.2 billion of CDS insurance could be triggered, Bloomberg report.
Greece is expected to present legislation involving the use of CACs in a debt-swap process to its parliament on Feb 21.