Sunday, May 13, 2012
Holdouts get paid, the rest can pray
Financial Times
May 13, 2012
So the last shall be first, and the first last:
for many are called, but few chosen
Matthew 20:16 (King James version)
No one really thinks of the euro area as “Christendom”, as they might have a century ago, but if there were ever a time for its bondholders to get religion, this would be it. After all, as what were thought of as material “facts”, such as sovereign guarantees and written contracts, dissolve in front of them, what is left besides transcendent faith?
And whatever your beliefs may be, those words above from the New Testament now seem rather prophetic, with respect to who gets paid what and when in the euro area.
Specifically, sets of creditors who once thought of themselves as undoubtedly first in line are now having their doubts.
Let’s consider Greece and Spain.
At the time when the Greek-forced writedown of private sector bonds was being imposed less than two months ago, there were open threats of a complete cessation of payments to any “holdouts”, or bondholders who refused to take the new “PSI” (private sector involvement) bonds, with their forced reductions in principal and stretchouts of maturity.
Can’t pay, won’t pay, to use a slogan of Seventies Italian radicals.
More
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No one really thinks of the euro area as “Christendom”, as they might have a century ago, but if there were ever a time for its bondholders to get religion, this would be it. After all, as what were thought of as material “facts”, such as sovereign guarantees and written contracts, dissolve in front of them, what is left besides transcendent faith?
And whatever your beliefs may be, those words above from the New Testament now seem rather prophetic, with respect to who gets paid what and when in the euro area.
Specifically, sets of creditors who once thought of themselves as undoubtedly first in line are now having their doubts.
Let’s consider Greece and Spain.
At the time when the Greek-forced writedown of private sector bonds was being imposed less than two months ago, there were open threats of a complete cessation of payments to any “holdouts”, or bondholders who refused to take the new “PSI” (private sector involvement) bonds, with their forced reductions in principal and stretchouts of maturity.
Can’t pay, won’t pay, to use a slogan of Seventies Italian radicals.
Guess what. Last Tuesday, the Greek Debt Management Office announced that it had paid a coupon that came due on Japanese yen-denominated floating rate notes (FRN), whose holders had held out. My own view is that this was not a bad idea, given that Japan still has the largest capital market in Asia. The Japanese holders had not threatened court action, or retaliation. They just expected their money, and got it.
On Tuesday, May 15, there’s a bigger payment due, which is the principal repayment on another holdout bond, a €436m floating rate note. The owners of a controlling share of the FRN voted against the PSI exchange offer.
This FRN is one of the few Greek government bonds remaining which has terms governed by foreign law, in this case English law, and small enough so that as few as one-third of the holders could block acceptance of the forced exchange offer.
The Japanese issue is probably held almost in its entirety by the original buyers, but it may be the case that a significant part of the €436m English law bond is owned by … speculators.
I don’t know if they have henchmen wearing black turtlenecks, or if they stroke white Persian cats while giving orders, but those people are not popular in Greece, Brussels, or Frankfurt. Will they get paid anyway? My bet is yes, as long as I can bet with your money.
If the FRN holders are paid on Tuesday, you can expect the despondent holders of the PSI bonds to perk up a bit. After, all, their bonds are also governed by English law. If a virtually dysfunctional Greek government, presiding over a rebellious Greek polity, can pay them with some of the cash they have from the troika, then there’s hope for them as well.
If the FRN holders are not paid on Tuesday, then after a 30-day “cure” period, you can expect a sheaf of bondholder lawsuits to be launched all over the world, seeking to tie up any Greek assets or payment streams that show their face. Then virtually the only buyers of peripheral Europe sovereign bonds will be the cash-challenged national banking systems of the issuing countries or the European Central Bank.
The IMF, the ECB, and all the other European supranational lenders know that. As one hedge fund manager (hisss!) who owns some Greek PSI bonds asserts, “Effectively, we are now senior to the officials sector. They have boxed themselves in. It will be hard for them to disengage with us holding an English law bond. That was the one thing we held out on in the negotiations, and now they are going to have to keep up the payments.”
As we have noted before, that will be done through the “escrow account”, which is a payment mechanism that allows the troika to make payments on the Greek PSI bonds even as its members withhold some, or all, of the cash that the Greek government was to get under the terms of the infamous “memorandum”. Even before the first payment on the PSI bonds, which is in September, some of that troika cash has been diverted to pay the Japanese.
Eventually, it is generally understood, though not admitted, there will be another round of reductions in the principal value of Greek sovereign debt, this time for the paper held by the official sector. These haircuts will be called OSI, or “official sector involvement”.
As far as the IMF is concerned, it will not be touched by OSI, which means the losses will be borne by official European institutions, I would think by some time next year.
Depositors also used to be senior creditors. Not now. Consider the pensioners and candy store owners who were depositors in Bankia, the just-nationalised Spanish bank. Less than a year ago, bank employees who looked like cashiers sold them Bankia shares that many assumed were money good.
As for the deposits they have left, those are backed up by collateral. Not that much collateral, since the ECB and other well-lawyered funders made sure that their advances were over-collateralised, which means, given the losses of equity value, that the depositors are under-collateralised. The under-lawyered should look for spiritual, not financial, comfort.
john.dizard@ft.com
No one really thinks of the euro area as “Christendom”, as they might have a century ago, but if there were ever a time for its bondholders to get religion, this would be it. After all, as what were thought of as material “facts”, such as sovereign guarantees and written contracts, dissolve in front of them, what is left besides transcendent faith?
More
On this story
Specifically, sets of creditors who once thought of themselves as undoubtedly first in line are now having their doubts.
Let’s consider Greece and Spain.
At the time when the Greek-forced writedown of private sector bonds was being imposed less than two months ago, there were open threats of a complete cessation of payments to any “holdouts”, or bondholders who refused to take the new “PSI” (private sector involvement) bonds, with their forced reductions in principal and stretchouts of maturity.
Can’t pay, won’t pay, to use a slogan of Seventies Italian radicals.
Guess what. Last Tuesday, the Greek Debt Management Office announced that it had paid a coupon that came due on Japanese yen-denominated floating rate notes (FRN), whose holders had held out. My own view is that this was not a bad idea, given that Japan still has the largest capital market in Asia. The Japanese holders had not threatened court action, or retaliation. They just expected their money, and got it.
On Tuesday, May 15, there’s a bigger payment due, which is the principal repayment on another holdout bond, a €436m floating rate note. The owners of a controlling share of the FRN voted against the PSI exchange offer.
This FRN is one of the few Greek government bonds remaining which has terms governed by foreign law, in this case English law, and small enough so that as few as one-third of the holders could block acceptance of the forced exchange offer.
The Japanese issue is probably held almost in its entirety by the original buyers, but it may be the case that a significant part of the €436m English law bond is owned by … speculators.
I don’t know if they have henchmen wearing black turtlenecks, or if they stroke white Persian cats while giving orders, but those people are not popular in Greece, Brussels, or Frankfurt. Will they get paid anyway? My bet is yes, as long as I can bet with your money.
If the FRN holders are paid on Tuesday, you can expect the despondent holders of the PSI bonds to perk up a bit. After, all, their bonds are also governed by English law. If a virtually dysfunctional Greek government, presiding over a rebellious Greek polity, can pay them with some of the cash they have from the troika, then there’s hope for them as well.
If the FRN holders are not paid on Tuesday, then after a 30-day “cure” period, you can expect a sheaf of bondholder lawsuits to be launched all over the world, seeking to tie up any Greek assets or payment streams that show their face. Then virtually the only buyers of peripheral Europe sovereign bonds will be the cash-challenged national banking systems of the issuing countries or the European Central Bank.
The IMF, the ECB, and all the other European supranational lenders know that. As one hedge fund manager (hisss!) who owns some Greek PSI bonds asserts, “Effectively, we are now senior to the officials sector. They have boxed themselves in. It will be hard for them to disengage with us holding an English law bond. That was the one thing we held out on in the negotiations, and now they are going to have to keep up the payments.”
As we have noted before, that will be done through the “escrow account”, which is a payment mechanism that allows the troika to make payments on the Greek PSI bonds even as its members withhold some, or all, of the cash that the Greek government was to get under the terms of the infamous “memorandum”. Even before the first payment on the PSI bonds, which is in September, some of that troika cash has been diverted to pay the Japanese.
Eventually, it is generally understood, though not admitted, there will be another round of reductions in the principal value of Greek sovereign debt, this time for the paper held by the official sector. These haircuts will be called OSI, or “official sector involvement”.
As far as the IMF is concerned, it will not be touched by OSI, which means the losses will be borne by official European institutions, I would think by some time next year.
Depositors also used to be senior creditors. Not now. Consider the pensioners and candy store owners who were depositors in Bankia, the just-nationalised Spanish bank. Less than a year ago, bank employees who looked like cashiers sold them Bankia shares that many assumed were money good.
As for the deposits they have left, those are backed up by collateral. Not that much collateral, since the ECB and other well-lawyered funders made sure that their advances were over-collateralised, which means, given the losses of equity value, that the depositors are under-collateralised. The under-lawyered should look for spiritual, not financial, comfort.
john.dizard@ft.com
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