Only in the eurozone can you make sovereign defaults “partial” and without any effects on actual debt burdens…
We’d emphasise that last point for Greece, but we’re also quite interested again in what the CDS market does here, despite its small size in relation to Greece and general lack of priority.
From the gist given by the FT – the new, improved, partial Greek default involves the same basic formula that the market has been discussing for months, namely a straight re-profiling of maturities. Straight, though we have no idea how many years will be added, whether coupons will be reduced, and so on. All of which will have differing effects on the net present value of Greek debt, but which do not amount to an actual haircut. It’s been rebranded but that’s basically it, a maturity swap.
Thus not wholly surprising to see Ireland’s two-year bonds capitulating in sympathy on Monday:
The Greek cash swap being talked about, however…
It’s already been suggested that there will be a small buyback of around 10 per cent of Greece’s debt in this deal. Which would be under €30bn of bonds affected — small but about the same as what a rescheduling of short-term debt would involve. For some reason buybacks are especially unpopular, but it’s the same problem for both swaps actually. Neither is a haircut. Buybacks seem a cheap solution (Greek three-year bonds are trading at 56 cents in the euro presently) but we think they’re even more of an immediate creditor subsidy than the French plan that’s now been rejected.
Essentially, so illiquid has the Greek market become, that surely it’s going to be easy to bid up short-dated paper in advance of an announced buyback, and therefore cash out of Greece with a far bigger recovery than would otherwise be received. Is it a crazy scenario? It’s been inherent in the bond buyback literature since this seminal paper on Bolivian purchases in 1988. In fact the only successful buyback we can think of in recent times was Ecuador’s, conducted after a formal default during the debt recovery stage and on a very opportunistic and secretive basis.
And you can see why exchanging Greek bonds for cash isn’t an ideal solution for reducing the country’s debt to GDP, given the cash would probably be sourced from EFSF lending to Greece. Technically this isn’t cutting Greece’s debt burden but merely redistributing it into the hands of the official sector.
So there you are. No one goes around partially pregnant, and it’s unlikely the sovereign is going to get anywhere partially burning its creditors.
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But about that CDS
It will be interesting to see, though, if an actual admission of default were to spark at least a query to ISDA on a credit event in Greece CDS. During the analogical period in Argentina’s default — we would say Greece is now at the stage of Argentina’s November 2001 debt exchange, where the ratings agencies also classed the country in a default for the first time in its crisis — it does seem that credit event requests were made. Ministerial statements on debt restructuring were enough to move the market once they were overt enough, it appears.
ISDA protocols were very different then but is this a bad time to point out that CDS on the SovX WE — and on every periphery name bar Spain — was blowing out to a record wide on Monday?
Related links:
Somewhere in the Argentine (CDS) Andean foothills… – FT Alphaville
Bond buyback irony in Europe – FT Alphaville