Just How Inevitable Is A Credit Event In Greece?

Photo: AP

Speculation has abounded for the last few months over whether or not there will be a credit event in Greece, where credit default swaps (essentially, insurance contracts on Greek bonds) will be paid out to bondholders.We’ve been following the debate for the last few months of whether or not EU leaders can and should pull a high-handed manoeuvre to avoid these contracts from being paid out, but now it looks as if they might just bite the bullet and let it happen already.

Today in Greek Parliament we’ll get a vote on whether or not to institute collective action clauses (CACs) on holdings of Greek bonds, which could bind bondholders to going through with the bond swap deal. They’ll likely pass the measures.

More interesting, however, is that according to Bloomberg¬†Greek Finance Minister Evangelos Venizelos says he wasn’t concerned about whether or not the new CAC legislation triggered these CDS payouts or not. This shows some inevitability that a credit event really might happen, and EU leaders just don’t care that much anymore.

From a Morgan Stanley note this morning, here’s a little more about what will and will not trigger a credit event:

From voluntary to coercive?

The first page of the press release by the Ministry of Finance of the Hellenic Republic (February 21, 2012) does not clarify the strategy with regards to the voluntary vs. coercive restructuring, in our view:

“The transaction is expected to involve a consent solicitation and an invitation to private sector holders of certain Greek bonds […] The Greek government will shortly submit to the Greek parliament a draft bill which, if passed, will introduce a collective action clause

[…] If passed, this law will be available to be used in the implementation of the PSI transaction if necessary to achieve participation at the levels anticipated by the 26 October 2011 Euro Summit Statement.”

The second part of the above statement seems to imply a time consuming process where investors would be called upon to vote the CACs in the case of an unsatisfactory participation rate. On the other hand, the first sentence mentions consent solicitation (i.e., exit consent) and hints to the Greek willingness to speed up the process of binding holdouts, as investors would give consent to vote CACs while they exchange bonds. This would overcome the above described time constraint.

The use of exit consent would bind holdouts automatically, if the participation rate is higher that the quorum, and CDS would most likely be triggered, as the restructuring would be considered most likely coercive. As said, only the introduction of CACs (without exit consent) would keep the option of voluntary non-binding restructuring, but this could require a lengthy implementation time.

However, Greece could try to make the vote of CACs unnecessary by introducing punitive Collective Action Clauses. In fact, this could materially increase the participation rate, as investors may want to avoid a more punitive scenario. CDS contracts would not likely be triggered.

Given the latest developments, we believe a coercive restructuring triggering CDS seems to be the most likely outcome.

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