"Are
you going to tell me," said Arthur, "that I shouldn't have green
salad?"
"Well,"
said the animal, "I know many vegetables that are very clear on that
point. Which is why it was eventually decided to cut through the whole tangled
problem and breed an animal that actually wanted to be eaten and was capable of
saying so clearly and distinctly. And here I am." …….
"A
very wise choice, sir, if I may say so. Very good," it said, "I'll just nip off and shoot myself."
(D.Adams, The restaurant at the end of the
Universe)
Douglas Adams the writer
of the Hitchhikers Guide to Galaxy, in his science fiction book the “The Restaurant at the End of the Universe”,
has a wonderfully surreal scene. Guests at the restaurant are asked to choose
which parts from a live animal they wish to eat, while watching the end of the
Universe. The animal voluntarily wants
to be eaten.
In
a strange sort of way this is what Troika is demanding from Private
bondholders. Bondholders are asked to voluntarily kill, or at least
half-mutilate themselves while the guests (Troika) are watching the end of
Greece. The end however could be either a big crunch (default) or a whimper
(no default but just slow death).
This
I guess is the 14.4billion euro question (Redeeming on 20th March
2012). Would the end come with a default or would it be just a big whimper? In
other words, a slow drift to a cold death with no bangs and no defaults.
My
guess is that it all hinges on what the ECB does with its Greek bond holdings.
Answering this would in my mind give you almost certainly the answer to the
Crunch/Whimper dilemma. Here is why:
Big
Crunch(Default)
ECB
owns around 20% of the outstanding Greek debt in Bond form. If it is excluded
from the PSI then others would free ride on the back of the ECB driving
participation down and making the introduction of CAC (Collective Action
Clauses) to force it up almost inevitable. There are many problems with this
strategy and we have outlined them in previous posts (CAC
Warpath, PSI
Enigma, ECB
and Europe, ECB
Accounting). With or without the ECB, however, there are very few that
would gain from a default. Banks holding bonds outright certainly don’t want
this. The ECB does not want this as it would mean losses for her and also
supporting the Greek banking system. Germany and the EU would have a much
bigger problem to solve in an election year. After all, Germany benefits from
the lower value of the Euro caused by the Greek crisis. It would be optimal to
stretch the rope to the breaking point but no further. Only a small fraction
perhaps less than 5% would stand to gain. The net CDS volume is around 3billion
and is insignificant. So, why is it you may ask that they cannot find an
agreement to the PSI? To me all this back and forth is just poker playing
trying to secure a better deal. Viewed under this light, many actions make more
sense. The only problem is that the rope might break earlier and for unforeseen
reasons (Greek political turmoil for example).
Big Whimper
(Slow cold death)
If
on the other hand Europe finds a way to relieve the ECB of its holding or if
the ECB decides to take the hit and participates in the PSI, the hold outs
would be reduced to a minimum. Namely, to retail bond holders and possibly
owners of Greek bonds under English (non-Greek) law. In this scenario, Greece
would not need to cause a credit event or introduce CAC’s to force the
participation up. It would also respect market practices and give time for
reflection and Election (see France, Germany)!
Conclusion
The
end game is very hard to call. Rationality and logic point towards a whimper
solution. Human failings and unpredictable events point to a big bang. D.Adams motto in the hitchhiker guide to the galaxy is DO NOT PANIC.
