Over a week after FT Alphaville first revealed how Greece’s Finnish collateral “deal” threatened a default on its foreign-law bonds, given negative pledge clauses in the contracts…
From Handelsblatt on Thursday:
The eurozone will not agree the agreement between Finland and Greece on collateral. “This is off the table,” ["Das ist vom Tisch"] Wolfgang Schaeuble, the [German] finance minister, said to a meeting of the CDU/CSU parliamentary group, sources told Handelsblatt.
Financial experts have warned [the Eurogroup] against allowing donor states to receive collateral on EFSF loans. In this case, Greece could get a wave of lawsuits from private creditors, the Handelsblatt learned from diplomatic circles in the EU. Private investors could rely on a so-called “negative pledge clause” in Greek government bonds
Which would be the clause we’ve picked over here, here, and here.
In a nutshell, the negative pledge clause provides that Greece must secure the bonds on an equal basis, if it should ever secure ‘external indebtedness’, as defined in the contract. The definition covers any money borrowed under a foreign law, it would appear. (Though it’d depend on what a court would say, if it comes to that!) EFSF loans are governed under English law for example. (There might be ways for Greece to pledge collateral via a Greek-law vehicle of some sort, although we aren’t sure.) But essentially, the Finnish demands for superior collateral currently stand to jeopardise the clause.
We’ve considered the pros and cons of the argument for whether it might be a CDS credit event as well as whether the collateral would be an event of default. Handelsblatt misses one big nuance though: this affects Greece’s foreign-law bonds, not the circa 90 per cent of Greek bonds that are governed by Greek law. But it’s a huge, huge deal not only for holders of these bonds, but possibly for holders of bonds and other contracts (repos?) that also contain cross-default clauses. Net notional on Greece CDS is relatively small, but there’s also a serious problem for the eurozone’s supposed commitment to avoid any trigger of credit default swaps on a member-state, not to mention the stigma of default on any part of a member’s debts.
The point is, this goes way beyond the fear (enunciated by Moody’s recently) that the Finnish collateral deal will delay or even stop the bailout. (Though that would risk a default on all of Greece’s debt.)
The rot’s gone a bit deeper than that now because of the complexity of the negative pledge issue. That’s why we wouldn’t put much store by Schaeuble’s peremptory statement that the issue has gone away.
Wait to see what the Finns say first of all. They have been insisting throughout this week that collateral (in some form) is a red line for them, but collateral in just about any form will trigger this negative pledge clause. Notably at pixel time an EU spokesman said that the talks on Greek collateral had no deadline. Therefore, no decision!
Just ask yourself one question. If you were an investor considering whether to trust Greece and take part in an expensive bond swap, the point of which is to avoid a disorderly default, what would you think about the kind of credibility and commitment shown in this Finnish farce? (Reuters was reporting that this bond swap had 50 per cent participation at pixel time, below the actual 90 per cent target. Not much time left.)
We’re not sure. Is ‘hoist with one’s own petard’ a popular phrase in Brussels?
Related links:
Collateral (credibility) damage – FT Alphaville
Will Finland sink the Greek bailout? – FT Brussels Blog