How not to draft a sovereign debt restructuring | FT Alphaville

How not to draft a sovereign debt restructuring

This is the authentic, accept-no-elisions list of financial institutions in support of the IIF’s Greece financing offer:

It’s been the source of much confusion on Monday, as Greek banks mysteriously disappeared from an original list – only to appear later once again. (And throughout it’s been clear that they would have the strongest incentives/disincentives of all to swap their bonds, making the situation all the more outlandish). BBVA and BayernLB were also shunted off and then back on the list.

With a big hat-tip to Megan Murphy, the FT’s investment banking correspondent, we think we know what’s happened. As Megan has learned from the IIF…

Version one of the published list did indeed contain EFG Eurobank Ergasias, Piraeus, BBVA and BayernLB but they’d been last-minute additions when the offer was released as the Brussels euro summit wrapped up on Thursday. It looks like an earlier, shorter list without them had already been prepared. (Version 0.5 maybe)

Version two of the published list replaced version one some time after Thursday and set out to correct the jurisdiction of Hellenic Bank, from Greece to Cyprus. The new list also removed Banco Credit de Peru, although it’s still not absolutely confirmed why they wanted out. It probably doesn’t matter much in the grand scheme (sorry, Peru).

Unfortunately version two was based on version 0.5 – according to the IIF. Now, there is some confusion, as we were told earlier on Monday from the IIF itself that version two was the correct and definitive one, i.e. EFG and Piraeus were not meant to be on there. And we ourselves were told as much by the IIF right until we heard that Piraeus Bank had made a complaint to get back on to the list…

This led to version three, the one you see above in all its glory. All four latecomers restored, the Peruvians out of it altogether. Oh and more supporters are due to be added later on, Megan says. We will merely suggest that the IIF leaves it there for now.

Why do we make such a fuss about the versions of a silly little list which doesn’t even correlate with who will take part in the Greek exchange anyway? (Since, to reiterate, Piraeus and EFG will take part.)

Because the financing offer includes such wonderful and hopefully accurate financial engineering as this:

(That one’s still stumping analysts as we write)

And there is naturally much debate as to whether the IIF plan increases Greece’s debt obligations (or pressures its outbound cashflow) by requiring it to fund the acquisition of collateral, or whether the NPV cut is enough for its debt sustainability.

We’d note other to-be-confirmed aspects of the offer, such as the arrangements for Greece buying back €12.6bn of its debt. This is quite simply one of the most complex restructuring processes for sovereign debt, ever. It already rivals Argentina’s 2005 exchange. We reckon that there is a good chance of the assumed 90 per cent participation rate if every Greek bank pledges its gigantic mountain of government paper, but one wonders, of course, about whether this will execute effectively overall.

If they can’t get a silly little list right…

Related links:
The price is right, Greek bond offer edition – FT Alphaville
Major banks hesitate to commit to Greek package – FT