Despite the EU statement’s vagueness on Greece, this new communiqué
reiterates is the idea of the voluntary character of the PSI exchange and that
the ECB will be exempt from participating.
ECB
While politicians muddled through the response to the Greek Crisis over
the last 2 years, the ECB was forced over to engage in unorthodox monetary
operations in order to firefight the European debt crisis. Part of it involved
the activation of the Securities Market Program whereby the ECB purchased
outright Government bonds of Greece, Ireland and Portugal and more recently
Italy and Spain.
Although the ECB is no longer buying Greek Bonds in the secondary
market, it is estimated that it still currently owns around 45billion worth of
Greek bonds. Most market participants believe that the great majority (around
75%) is concentrated in the near maturities, namely 2012-2014. These bonds
however, are not marked to market by the ECB but instead they are marked at the
purchase price and amortized to Par. If the ECB participates in the current PSI
proposal, the remarking of these bonds to their true value would result in a
huge loss on their position. We guess-estimate that the average purchase price of
its Greek bond holdings was around 78%. Assuming
they are marked at the purchase price, the losses would exceed €12bn and would
be larger than the ECB €10.8bn of equity, forcing the ECB to raise capital from
its shareholders (National Central Banks). However, as they are marked at
Purchase price plus amortization to Par, the losses would be even greater if the
ECB is forced to take a 50% cut on their position (18-20billion). Hence, the
insistence of the ECB in exempting herself from any Greek restructuring.
According to press reports the ECB tried to offload their holdings to the EFSF
back in March but the European leaders refused the request. Apparently, Jean
Claude was not pleased and henceforth hardened his stance towards the
politicians who got him into this mess.
PSI
The new PSI that was announced on the 27th October however,
involves a 50% outright haircut on the face value of the Greek bond, should one
chose to participate. We do not have details on what is going to happen to the
other 50%, but it is highly likely that holders would suffer some NPV losses on
top of the notional loss. This means one thing. The incentive to Free Ride along the ECB has been greatly increased
risking the PSI participation.
FREE RIDING
So, if you chose to free ride along the ECB, what is the best strategy
and what can we say about the voluntary participation on the PSI. Let’s go
through the process step by step:
- In December 2011 the IIF concludes the initial discussions on the exchange and collects commitments. By then, bond holders would know the size of the haircut (Face+NPV) and the options available. Given the large size of the haircut one of the carrots must be that the new bonds would be under English law (with CACs and Negative Pledges etc) and as much as possible collateralized with AAA zero coupon or upfront payments.
- In January 2012 the exchange would take place. Following this, most of the Greek debt would be “External debt” (not under Greek jurisdiction) apart from the ECB holdings and any Free Riders.
- If now the EU or the Greek government wishes to punish these Free Riders it can do so easily by changing the terms of the bonds that are still under Greek law. The problem is that the great majority of the Free Riders consist of the ECB who owns 45billion. Thus, unless the ECB offloads these bonds to some third party the EU/Greece would have to wait until the stock has come down through redemptions. Given that the ECB owns mostly maturities of 2012-2013 this pushes the punishment to 2013. These ties nicely with the introduction of the ESM. In conclusion, the risk of punishing the Free Riders increases after 2013 and is minimized the closer we are to 2012 (see table of bonds).
- The Free Riders who already own Greek bonds under English law (those with ISIN that does not begin with GR) do not have to do anything (see table). They can sit and wait to be paid. They are Pari Passu and are protected by English law as much as the PSI ones. If they try to punish them then they are risking punishing the PSI bonds too. Thus there is little incentive for bond holders of Greek bonds under English law to participate in the PSI and every incentive to go and buy them now and wait.
In conclusion, given the large size of the haircut that was decided and
the large side of the ECB holdings, we expect many hold outs and Free Riders in
Bonds maturing up to 2013 and in the bonds under non-Greek law. Whether this is
enough to risk the PSI participation remains to be seen, but at least for
investors holding bonds maturing in 2012-2013 the future looks brighter after
the EU summit.
Bonds under Greek law maturing
through 2014. There are 45billion maturing in 2012-13.
Currency
|
Coupon
|
Maturity
|
Size
|
EUR
|
4.30%
|
20-Mar-12
|
14,400,000,000.00
|
EUR
|
5.25%
|
18-May-12
|
8,000,000,000.00
|
EUR
|
4.10%
|
20-Aug-12
|
7,700,000,000.00
|
EUR
|
4.60%
|
20-May-13
|
9,100,000,000.00
|
EUR
|
4.00%
|
20-Aug-13
|
5,800,000,000.00
|
EUR
|
6.50%
|
11-Jan-14
|
4,600,000,000.00
|
EUR
|
4.50%
|
20-May-14
|
8,500,000,000.00
|
EUR
|
5.50%
|
20-Aug-14
|
12,500,000,000.00
|
List of bonds issued by the Hellenic republic and are under non-Greek
law (up to 2020). For details one has to look at each prospectus. The size is
around 15billion.
ISIN
|
Currency
|
Coupon
|
Maturity
|
Size in Currency
|
Size in EUR (appox)
|
XS0147393861
|
EUR
|
FRN
|
15-May-12
|
450,000,000
|
450,000,000
|
FR0000489676
|
EUR
|
4.915
|
13-Sep-12
|
200,000,000
|
200,000,000
|
XS0208636091
|
EUR
|
3.5625
|
21-Dec-12
|
250,000,000
|
250,000,000
|
XS0165688648
|
EUR
|
4.495
|
02-Apr-13
|
430,000,000
|
430,000,000
|
XS0372384064
|
USD
|
4.625
|
25-Jun-13
|
1,500,000,000
|
1,079,136,691
|
CH0021839524
|
CHF
|
2.125
|
05-Jul-13
|
650,000,000
|
532,786,885
|
XS0142390904
|
EUR
|
5.46
|
30-Jan-14
|
197,000,000
|
197,000,000
|
XS0097596463
|
EUR
|
VAR
|
21-May-14
|
70,000,000
|
70,000,000
|
JP530005AR32
|
JPY
|
7.35
|
03-Mar-15
|
10,000,000,000
|
95,238,095
|
JP530000CR76
|
JPY
|
5.8
|
14-Jul-15
|
20,000,000,000
|
190,476,190
|
FR0010027557
|
EUR
|
4.68
|
29-Oct-15
|
200,000,000
|
200,000,000
|
JP530000BS19
|
JPY
|
5.25
|
01-Feb-16
|
30,000,000,000
|
285,714,286
|
XS0165956672
|
EUR
|
4.59
|
08-Apr-16
|
400,000,000
|
400,000,000
|
XS0357333029
|
EUR
|
FRN
|
11-Apr-16
|
5,600,000,000
|
5,600,000,000
|
XS0193324380
|
EUR
|
FRN
|
24-May-16
|
250,000,000
|
250,000,000
|
JP530000CS83
|
JPY
|
5
|
22-Aug-16
|
40,000,000,000
|
380,952,381
|
XS0071095045
|
JPY
|
4.5
|
08-Nov-16
|
40,000,000,000
|
380,952,381
|
JP530005ASC0
|
JPY
|
4.5
|
06-Dec-16
|
8,700,000,000
|
82,857,143
|
XS0215169706
|
EUR
|
4.028
|
17-Mar-17
|
450,000,000
|
450,000,000
|
XS0078057725
|
JPY
|
4.5
|
03-Jul-17
|
30,000,000,000
|
285,714,286
|
XS0079012166
|
JPY
|
3.8
|
08-Aug-17
|
50,000,000,000
|
476,190,476
|
XS0160208772
|
EUR
|
5.014
|
27-Dec-17
|
165,000,000
|
165,000,000
|
XS0260024277
|
EUR
|
FRN
|
05-Jul-18
|
2,100,000,000
|
2,100,000,000
|
XS0286916027
|
EUR
|
VAR
|
22-Feb-19
|
280,000,000
|
280,000,000
|
IT0006527532
|
EUR
|
5
|
11-Mar-19
|
200,000,000
|
200,000,000
|
XS0097010440
|
JPY
|
3
|
30-Apr-19
|
25,000,000,000
|
238,095,238
|
XS0097598329
|
EUR
|
VAR
|
03-Jun-19
|
110,000,000
|
110,000,000
|
XS0280601658
|
EUR
|
4.218
|
20-Dec-19
|
255,000,000
|
255,000,000
|
XS0224227313
|
EUR
|
VAR
|
13-Jul-20
|
250,000,000
|
250,000,000
|
