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Friday, March 9, 2012

Greece: Default or No Default?

Yesterday, 83 percent of Greek sovereign debt holders agreed to “voluntarily” exchange their bonds for new bonds with face value of 53 percent of the original bonds. The Greek finance ministry announced that it would invoke the collective action clause to impose the swap on an additional thirteen percent of bond holders who did not agree to the swap. This thirteen percent purchased Greek sovereign bonds under Greek law and are subject to the parliament’s collective action clause. This seems to leave seven percent holdouts who did not agree to the swap and did not purchase under Greek law. What will happen to them remains unclear.

With this “successful” restructuring, the troika monitoring Greece agreed to release a new tranche of bailout funds to stave off a “disorderly” Greek default. These funds will give Greece a short amount of breathing space.

Notably, the Wall Street Journal referred to yesterday’s actions as  “the largest-ever sovereign-debt default and the first for a Western European country in half a century.” As I write, the ISDA is meeting in London to rule whether Greece’s actions will trigger the 3.8 billion Euros of credit default swaps. Greece and the EU had hoped to label the debt restructuring as “voluntary” and hence avoid the CDS trigger. [Yes, they did agree on the obvious: Greece did default].

These dramatic events simply give Greece perhaps a month of breathing  space. Greece cannot borrow and must meet its austerity pledges to the EU, European Central Bank, and the IMF before it can tap more rescue funds. With parliamentary elections forthcoming and austerity universally unpopular, Greece will not be able to implement its austerity program, in my view. At that point, the troika must decide whether to bail Greece out with no conditions or to let in go under and leave the Eurozone.

The Greece story is only beginning.

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