intelligenter Beitrag von Joseph Cotterill: Finland’s got a secret

Email SharePrint

Finland’s got a secret

Posted by Joseph Cotterill on Mar 02 18:50. A reader passes on this curious detail from a Finnish MPs’ debate on Greece (via Helsingin Sanomat):

Some MPs expressed shock that the Ministry of Finance decided to keep the collateral agreement reached between Finland and Greece a secret.
The English-language version has been available to MPs to read, but only under heavy guard.
“All MPs need to have a genuine possibility to acquaint themselves with documents that are important from the point of view of making decisions, and in their own mother tongues”, said Markus Mustajärvi of the Left Group.
[True Finns party leader Timo] Soini said that the Belgian culture of secrecy has now arrived in Finland.

The background here: Finland has made a collateral deal (loads of earlier false starts) with Greece given its involvement in the second bailout (therefore from a northern eurozone country’s point of view, an involvement in credit risk).
The deal’s not a total mystery, but details are lacking. What’s more, they are lacking when it’s pretty clear that the Greek bondholders tendering into PSI — who’ve been promised ‘co-financing’ of their new bonds alongside EFSF loans — should at least be aware of what’s going on here.
Reuters reported on 15 February that Greek banks would provide cash and “highly rated” assets to an escrow account over time, constituting collateral for a portion of Finland’s guarantee on loans to Greece. Now, a note from the Finnish government to parliament mentions the agreement being signed on 20 February.
But the note says that the deal works in the following way. The Greek banks release “Greek government securities” to a trustee (an “international investment bank”) which sells them in the market. The trustee puts the revenues into this escrow account (possibly, but we’re not sure, in the form of “safe bonds”).
We’ve also found a diagram (in Finnish) of how it generally works, from a finance ministry presentation:

Also, since the process kicks off with Greek government bonds, the note adds this:

Greek government bond liquidity is currently weak, and therefore is not legitimate to try to sell them on the market all at once. Transaction will be implemented in phases so that the agent sells the bonds in installments during the years 2011[sic?]-2014

So what have we got here? And, what details are missing?
As a banker quoted by Reuters said, it’s a little bit like Greek banks selling CDS on Greece to Finland. (It would be a fully funded CDS, i.e. the notional amount will be transferred to an account by the seller. We suppose.)
An FT Alphaville reader who’s closely followed the Finnish collateral issue earlier told us it could also be compared to exchanging a credit-linked note, with the proviso that the Finnish government can’t use the collateral assets in the meantime. The Greek banks meanwhile get the assets back (plus interest etc) if Greece manages not to trigger a credit event around its EFSF loans, judging by the Finnish finance ministry note.
What definition of credit event, we don’t know. Finnish MPs, it seems, don’t know.
What bonds are held in the escrow account exactly, we also don’t know.
Credit event one’s the biggie it seems. As certain events this week have proved, it matters exactly how credit events in financial derivatives contracts are defined. It matters who defines them, and who interprets them. (There is no mention of the determinations committee, or CDS credit event definitions, used by Isda in the stuff above, for example.)
It also matters in that a restructuring (or even write-down) of the official loans to Greece seems the logical next step if when the Greek sovereign needs further debt relief. Can’t zero the private bondholders at this point, when they’re getting the new English-law, credit-sweetened, etc bonds from this restructuring.
And oops, we almost got to the end of this post without explaining why it is Greek banks providing this collateral service rather than the Greek state. This is a legacy of past Finnish collateral demands running into negative pledge clauses in foreign-law Greek bonds.
Those clauses demanded equal treatment or immediate repayment for the bonds’ holders if Greece secured its “external indebtedness” (such as English-law eurozone bilateral loans) with assets. Much complication ensued with attempts to engineer a special purpose vehicle to handle Finland’s collateral with a sufficient degree of legal separation from the Greek sovereign. (It’s worth adding that the new restructured Greek bonds also contain negative pledge clauses, but pertaining to a different specific definition of “relevant indebtedness”:)

We think bondholders would be interested to see the collateral agreement made public, just to be clear on how it works and whether or not it does affect them (say on negative pledge, credit events etc). And can’t Finnish MPs have a proper look too?
Related links:
An (EFSF) credit derivative is born – FT Alphaville
Bilaterally — yours? – FT Alphaville
This entry was posted by Joseph Cotterill on Friday, March 2nd, 2012 at 18:50 and is filed under Capital markets. Tagged with EFSF, Finland, Greece, Sovereign debt, Sovereign default.

 http://ftalphaville.ft.com/blog/2012/03/02/907591/finlands-got-a-secret/