You might have heard of the latest Finnish proposal to collateralise loans to Greece. This would transfer Greek privatisation assets to a Luxembourg-based société anonyme to be held as security against default, according to Reuters, which also has the proposal text.
Here’s a nice diagram of it all works:
Here’s a not-so nice bombshell that seems to have been missed:
We’d hate to say we told you so. But we did. This is firstly another official acknowledgement that the negative pledge clause — which forbids Greece securing foreign-law or foreign-currency “external indebtedness” on terms prejudicial to its foreign law bonds — does present a serious problem. Notably, it’s a serious problem even for proposals based on SPVs, which had been seen as a way to avoid a negative pledge trigger.
Still. What Finland has unfortunately omitted to add: if there is no bondholder waiver, and if Greece does not secure the foreign-law bonds on the same basis, Greece will default on these bonds. It would be the first sovereign default in modern Western Europe. Possibly a credit event too.
We’re not even sure that Greece could actually provide sufficient assets to collateralise both the EFSF loans and foreign-law bonds. These assets are already marked for privatisation and there may simply not be enough to go round even if they weren’t being sold.
Amazingly, Finland has spun the negative pledge problem and its massive risk of default as an opportunity for credit enhancement:
You couldn’t make this stuff up.
Update 10:25am UK time — You can still consider ways around the negative pledge issue however, surmounting the current Finnish proposal.
One idea suggested to us on Monday is for the EFSF to lend to the SPV itself rather than to Greece directly. In that case, the EFSF is not a secured creditor of Greece per se. It’s not a million miles from how current Greek government securitisation vehicles work. These have existed for years without triggering negative pledge clauses so we’re interested to see if there is a solution here. We’ve altered the diagram above with our rubbish MS Paint skills to note the EFSF change…