The International Monetary Fund also opposes the agreement, because it could threaten the IMF’s customary “preferred creditor” status that ensures the fund is always first to be repaid, officials say.
Earlier discussions had focused on finding liquid Greek assets—cash and possibly gold—that could be used as collateral. But now governments are considering whether illiquid assets such as Greek companies or even real estate could be used, the officials say.
(Not that officials are making it up as they go along or anything.)
Note how the discussion is no longer about dropping the demand for collateral, just changing its structure. We’re not sure what precisely the thinking is here – maybe that illiquid (but real!) assets might be easier for Greece’s cash-flow than having to deposit cash on a rolling basis.
Moody’s warned a few days ago about a general Greek payments default if the cash demand got too big. This kind of uncertainty on what collateral is being asked when appears to have sent the Greek bond “market” (or what’s left of it) into a sell-off on Wednesday. Two-year bond yields are close to 41 per cent. Five-year CDS has repriced to 2,200bps, according to Markit. Well who knows, really.
What we do know is that if there’s still collateral on the table, the debate on what happens to negative pledge causes in foreign-law Greek bonds hasn’t gone away.
We’ve listed why the Finnish collateral might trigger the negative pledge clause, and why this might also trigger a rare type of credit event — if there are even Greece CDS contracts with these events included. But it all depends on holders coming forward to challenge the collateral deal, which itself might depend on the collateral deal taking a final shape.
Though we have come across two interesting reasons why Greece might avoid triggering negative pledge clauses anyway, depending whether the collateral is constructed in a particular way.
First — any long-time follower of Greece’s debt crisis will know that Greek governments put together a number of securitisations in the 2000s — usually Luxembourg-domiciled sociétés anonymes. These were backed by revenue streams, including air traffic control fees, state lottery earnings, and (er) EU structural funds. It raised cash and took debt off-balance sheet, which was not really a good idea. It all blew up in 2009.
The thing is — no holder of a foreign law bond challenged the secured notes issued by the securitisations, as an example of Greece securing (foreign-law) external indebtedness which might break the negative pledge clause. This could be taken as a sign that the negative pledge clauses were treated as “boilerplate” although we think that Greece was actually careful to navigate around the negative pledge problem even when transacting with each SPV as its sole counter-party and intermediary with investors.
If you look at an offering circular for secured notes issued by Ariadne SA (that’s the air traffic control one), you will find that the domicile agreement is governed by Luxembourg law and the notes governed by English law – but the pledge agreement within the notes remains governed by Greek law. (So is the actual transfer of assets.) Maybe it’s a red herring, but it seems to indicate that the issuer is aware of negative pledge issues, or at least provides another layer to suggest SPVs insulated Greece from negative pledge.
But however they did it, this at least creates the possibility that the Finnish collateral could be arranged via a similar hybrid Greek SPV. The SPV idea has already been raised in comment previously — we now hear that there was a serious plan to manage the collateral for private creditors using an existing SPV as well, before the IIF bond swap was finalised. The SPV was the Greek Privatisation Fund. If it will now be the case that privatisation assets are used to collateralise eurozone loans to Greece, you can see why it might be worth debate once more.
The other idea is a bit more simple. The EFSF loans to Greece (that Finland and others are backing) are governed under English law, so they look like they could trigger a negative pledge clause if there’s a move to secure them with collateral. That is, Greece pays cash back (or lines up an Olympic stadium or stake in Opap, whatever) into a fund as when loan tranches are released. You don’t have to do it that way though. One analyst pointed out to us that the EFSF could itself set aside a special cash reserve for guarantors like Finland, passing a fee or cost on to Greece in its loan rate.
The very last resort we suppose is to go back to arguing that the negative pledge clause really is ‘boilerplate’ that should have less power in law than usually thought. Hat-tip to the commenter who pointed us to this paper co-authored by Lee Buchheit on the issue:
It’s a good read. Not least because Greece now retains Buchheit’s firm as legal advisers on its debt restructuring. Buchheit contends that this kind of clause is a fallacy – and even uses an analogy with bar tabs. We wouldn’t allow bartenders to bind their customers to paying off bar tab pari passu with their taxes by virtue of a simple clause. In short, the paper says, such clauses are a historical relic of problems with sovereign debt collateralisation in the 1800s. They survive today mostly because of “sentiment” among bondholders.
Debate that as you will. We’ll note that Greece was actually a major collateralised sovereign borrower in the 1800s, largely the result of European powers trusting neither governments in Athens, nor each other, that they could all keep Greece solvent. That history is really why we’re interested in the complete mess set off by Finland, even if there might not be much effect on credit markets in the end.
We seem to be repeating history.
(By the way — there was a mad, mad, mad rumour in the market at pixel time that spot gold’s 3 per cent drop on Wednesday was due to peripheral sovereigns selling gold for collateral. We doubt it)
Greek covered bonds to the rescue? – FT Alphaville