A Greek restructuring to avoid euro tragedy

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The European leadership has been expending a great deal of rhetoric on denouncing the workings of capital markets and speculators in the Greek crisis without, apparently, bothering to determine what those workings are.

It’s not that hard to find out; any politician or official who wants to know what “the market” or “the speculators” are expecting need only pick up the phone and ask those who do this for a living. The only risk, apparently an unthinkable one in Brussels and Frankfurt, is that they might have to admit their ignorance.

At the moment, the markets for Greek debt are in a sort of interregnum between “desks”, or departments, of the banks, dealers, and institutional investors.

For the people involved, the question is not: “How will Greece, the EU, and the IMF square up to each other?” Rather, it is: “Who is going to trade this stuff? Will it be us on the investment grade desk, those Argentine and Russian expats on the emerging markets desk, or those lawsuit-swinging animals over in distressed debt?”

The now-required expertise may be with the distressed debt people, but the mandate is held by the investment grade clan.

The real speculators are, for the most part, out of the euro-divergence trade. They made their money, and covered their short positions, when Greek bond yields were 400 or 500 basis points lower than they are now. The sellers, or would-be sellers, of Greece at this point are the big banks and institutions, who are trying to hedge the now unhedgeable.

David Aserkoff, a strategist at Exotix, the London dealer in “frontier” debt, the scary part of emerging markets, says the firm has just begun to work on Greek paper. “Very little Greek debt is going through emerging market desks just yet,” he says, “because the big banks have turf battles going on.”

The macro hedge funds so hated by the eurocracy, in his words, “thought they could make money trading (Greek bonds), but didn’t want to be in the press”, which is consistent with what I hear elsewhere. However, the subordinated debt of Greek banks is beginning to get to the motivated-seller, half-off levels that would interest bottom fishers. As Mr Aserkoff says: “If you are a spivvy [cynically speculative] hedge fund, you might buy [a certain Greek bank’s] Tier 2 debt in the hope they would be taken out in a year or two.”

The thought is that some solvent European bank would want the opportunity to buy a Greek retail business on the cheap by converting the debt to equity. “In some ways Greek bank debt is worth more than Greek sovereign debt because of the M&A angle.”

If there is little trading by anyone in Greek state debt, there is a lot of preparatory work being done for the forthcoming rescheduling. The jet-lagged people who do this business, in between therapy sessions or serial marriages, are debating just what structures make sense for Greece. They aren’t, as noted, getting much co-operation from Brussels or Frankfurt. In private, though, it would seem the Greeks are matter-of-fact about considering structures and timing.

There is a large body of recent precedent to be found south of Europe for such a deal. A less-than-optimal Argentine bond-for-defaulted-bond exchange offer has been in the market, and its merits and demerits are known and closely calculated. The Seychelles did a “voluntary” exchange offer for their $335m or so of international debt that closed in February, which resulted in a 50 per cent writedown of its face value. The African Development Bank provided a rolling guarantee of two years’ interest payments to give some slight comfort to the holders of the new paper.

Lee Buchheit, a partner specialising in sovereign debt law with New York’s Cleary Gottlieb, recently commented: “The worst case scenario here is one in which the bail-out money is exhausted in an effort to “brass it out” . . . only to find that a debt rescheduling cannot be avoided. [Then] those resources might have been used in some creative way to facilitate the debt restructuring. . . or to backstop the local deposit insurance scheme or recapitalise local banks. A sovereign debt restructuring with no fresh money behind it is both a harder and an uglier thing to complete.”

While the Greeks are, in the words of one distressed debt investor, “very hush hush about it”, they see well beyond the hoped for post-bail-out bounce. A debt restructuring will happen well before the supposed end date of the bail-out facility. The inevitable popular and editorial outrage from the north might help sell the sullen Greek polis on the austerity plan.

That plan is partly about providing some capital to cover the operating losses to break-even, to use a corporate analogy, but it is also about channelling some capital back to the current lenders, and, hopefully, reducing the European Central Bank’s current open-ended transfer payments, sorry, I meant repo facility for Greek government bonds.

One of the rescheduling structures discussed before is the “par bond”. These are bonds with below market interest rates and long maturities that have face values notionally equal to those of the old bonds for which they are exchanged. Of course in net present value they are worth much less, but for regulatory or accounting purposes they could, with an official nod, be considered money good when put in a held-to-maturity basket.

A Greek restructuring done soon-ish would not, in itself, require such fictions to preserve the apparent solvency of the European banking system. An exchange offer that did include them might, however, be used as a precedent for future, larger, euro area distressed government deals. Having that in place would give the currently panicked eurocrats a script they could use again in the grim years to come.


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