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Who Thinks Greece Will Default This Weekend?

Saturday, September 10, 2011 18:50

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Not Me!! I base that on the yields of very short term Greek T-Bills, which actually retreated this week, not withstanding the record wides in the Greek Sovereign CDS, which currently stands at 3188 and prices in nearly a 95% chance of default.

GREEK 3 MONTH BILLS

GREEK 6 MONTH BILLS

Having said that, all is certainly not well. Friday was the deadline for participants in the Greek debt swap to indicate whether they would participate, and rumours are that the participation rate is under the 90% Greece demanded (see below). As you may recall, this debt swap gives participants a qualified ~20% haircut. Now, Greece has a debt/GDP ratio of between 125 and 150%, depending on who you read. A 20% haircut would leave them with a ratio between 100 and 120%. Clearly, this is still not sustainable in an economy that is shrinking at an annualized rate of 8%! For Greece to arrive at a potentially sustainable ratio of 60%, holders of Greek debt need to take a haircut of between 52 and 60%!! I would suspect the latter figure is more accurate, giving a recovery rate of 40% on the debt.

Debt Swap Participation Rate Below State’s Target

Further issues arose last week with short term funding of Greece’s debt, as detailed in the article below. It will almost certainly be an event like this that brings this matter to its only logical conclusion – a hard Greek default!

Prospect of empty coffers looms large

“The prospect of a freeze in payments appeared even more serious on Thursday, after Greek commercial banks failed to cover the sum of 300 million euros of supplementary, noncompetitive bids for Tuesday’s auction of [6 month] T-bills, providing only 155 million. The shortfall is interpreted as a clear message by banks to the government that they are unwilling to fund future issues of T-bills.”

There was also noise about whether some of the Greek state owned corporations whose debt is guaranteed by Greece could wind up triggering an acceleration of payment event for GGB’s. The matter arose regarding the debt of Hellenic Railways, whose bonds apparently contain language implying that Greece’s starting negotiations with creditors could allow Hellenic bondholders to demand immediate repayment of bonds (acceleration). The negotiations in question would, of course, be the proposed debt swap. In this instance, GGB’s themselves would not trigger a credit event, but acceleration of state-guaranteed non-government debt would, as Greece may not be able to pay. The link below explains that an acceleration in the Hellenic Railways bond themselves would not trigger a CDS event for Greece, although it could start a cascade of cross-defaults that could lead to that if Greece cannot pay.

Has Hellenic Railways triggered a Greek moratorium? asks Alphaville

Finally, we have the resignation of Jurgen Stark from the ECB, apparently because he disagrees with the ECB’s emerging policy of purchasing peripheral government bonds. IMO, this could be short term bullish for peripheral government debt, as it signals that the ECB plans to do more of the same, perhaps on a larger scale. Of course, this could get interesting, as the ECB is currently mandated to sterilize purchases in order to avoid inflation. In other words, they are constrained from outright debt monetization. Of course, that could change if things get bad enough. For now, however, the bigger question for me is whose bonds the ECB would sell in order to sterilize their peripheral purchases? German bunds?

My next post will give some technically based support to this idea that we are closer to some kind a short term rebound than a catastrophic plunge come next week. To be clear, when Greece does default, I do expect a plunge. I do not think it is fully priced in at all.

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