Photo: Milos Bicanski / Getty
ORIGINAL (12:27 PM ET): Dow Jones is reporting that a deal between the Greek government and representatives of its private creditors is just hours away, according to an official close to Greek Finance Minister Evangelos Venizelos.We’ve been hearing a string of rumours for weeks about a deal being near, however given the progress of the negotiations to date this rumour is quite plausible.
The major point investors will be looking at here is whether or not the European Central Bank takes part in the restructuring. The central bank is actually the single biggest holder of Greek sovereign bonds, an estimated €50 billion ($65.8 billion) which it purchased at a discounted €38 billion ($50 billion) in an attempt to keep sovereign borrowing cheap for the troubled country.
While we reported yesterday that officials and banking representatives increasingly saw the bank’s participation as a sticking point for the deal, the ECB has publicly refused to chip in on the bailout effort despite statements by the IMF’s Christine Lagarde that such contribution might be necessary.
Last we heard, private investors were going to have to take losses of about 70 per cent on their holdings of Greek bonds.
There are two big problems with this deal, however:
1) Greece’s debt will still be unsustainable, probably regardless of how much the ECB chips in.
2) Just because banking representatives agree to a deal does not mean that individual financial organisations will follow suit. This deal almost assuredly assumes that Greece’s creditors will participate “voluntarily” to avoid provoking a credit event (where CDS insurance contracts against Greek default would be paid out). But this overlooks the fact that investors are unlikely to stomach such high losses without receiving the money they were promised in hedging against the possibility of default.
This latter point poses the crux of the problem with any deal that will be decided upon today. It would appear that the occurrence of a credit event would be the most positive outlook for investors regardless of what EU leaders say; the Greek CDS industry is relatively small and shocks could be—and may have already been—absorbed there.
But the refusal to allow a credit event to occur would create completely jeopardize faith in the CDS industry as a whole, a contingency which would cause enormous collateral damages. It is arguable that ECB involvement would numb this fear, however this appears to be a more uncertain and far more frightening outlook.
Bottom line: even if a deal is announced, take it with a grain of salt.
UPDATE: Now it looks like the Greek debt swap deal might not actually be signed today. Reuters changed the wording on its report to read “this week” and not today just a few minutes ago (via @ChrisAdamsMKTS).
Given that these talks have been happening on and off since October, we can’t exactly say we’re surprised.