Unless It’s a Typo, Greece is Going to Default on Its Default!

Buried amidst the details of today’s Financial Times account of the Greek default was  a sensational figure. If I understand it correctly, it said that the “new” Greek bonds are trading in grey markets at 28 to 40 cents to the Euro. Following this was the remarkable statement that, in effect, said that  markets anticipate that Greece will default on its default.

Banks that exchanged “old” for “new” Greek bonds got about 47 cents on the Euro. If they were to turn around and sell them on the market at 40 cents on the Euro, they would get about 18 cents per Euro on their “old” bonds. Or did I miss something?

I also believe that the European Central Bank has agreed to accept the “new” Greek debt as collateral at their full face value. If so, the European Central Bank will be holding collateral assets that are overvalued by 60 percent.

Maybe I am missing something, but if I am right, this sounds sort of crazy to me. Can someone help me out on this?

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.

I Repeat Again: There Is Still No Greek Solution

The press is again full of reports that the troika (IMF, EU, and ECB) have reached an agreement on Greece. Markets will again rise, until they see that little has happened.

The troika has agreed to release a new tranche of rescue funds to stave off a March Greek default. Private lenders have agreed to their haircut (but that had really been decided a long time ago). The rescue funds will probably be doled out slowly to make sure that Greece meets its end of the bargain and cuts wages and public sector employment.

With an election coming up (and the public vehemently against outside intervention and austerity), Greece cannot meet its end of the bargain. Greece can only do so by agreeing to be governed by external bodies, such as the troika, which spells the end (temporarily perhaps) of Greece independence.

This is one of a hundred of steps that remain to be taken before we can say that Greece has been rescued.