Greece elects to Default on its Bonds – If the Rule of Law is Enforced

by John Galt
February 21, 2012 05:05 ET


The technocrats are all patting themselves on the back but the truth about today’s “bailout” announcement comes from the Hellenic Financial Authority and its statement today (via The Athens News):

The Hellenic Republic today announced the key terms of a voluntary transaction in furtherance of the 26 October 2011 Euro Summit Statement, known as the Private Sector Involvement, and in the context of its economic reform programme that has been agreed with the European Union and the International Monetary Fund. The transaction is expected to include private sector holders of approximately EUR206 billion aggregate outstanding face amount of Greek bonds (excluding treasury bills).

The transaction is expected to involve a consent solicitation and an invitation to private sector holders of certain Greek bonds to exchange their holdings of existing Greek bonds for new bonds to be issued by the Hellenic Republic having a face amount equal to 31.5% of the face amount of the debt exchanged and notes of the European Financial Stability Facility maturing within 24 months having a face amount equal to 15% of the face amount of the debt exchanged, each to be delivered by the Hellenic Republic at settlement. Each participating holder will also receive detachable GDP-linked securities of the Hellenic Republic with a notional amount equal to the face amount of the new bonds of the Hellenic Republic issued to that participating holder. The full terms of the transaction will be set out in the relevant invitation memoranda which are expected to be made available in the coming week.

The Greek government will shortly submit to the Greek parliament a draft bill which, if passed, will introduce a collective action clause into eligible Greek law governed bonds of the Hellenic Republic as determined by the Council of Ministers of the Hellenic Republic. If passed, this law will be available to be used in the implementation of the PSI transaction if necessary to achieve participation at the levels anticipated by the 26 October 2011 Euro Summit Statement.

“A successful PSI transaction is required to bring Greece’s debt-to-GDP ratio on a downward path reaching 120.5% by 2020,” said Mr. Evangelos Venizelos, Greece’s Deputy Prime Minister and Minister of Finance. “It is also a condition for the continued disbursements by the official sector, which are essential for the implementation by Greece of its economic reform programme. We have been consulting with our private sector creditors to design a transaction that is consistent with the Euro Summit Statement of 26 October 2011 and that will both enjoy broad support from investors and further the country’s goal of achieving a sustainable debt profile.”

Translation? In two words or less this is called a selective default. The government is not redeeming the bonds issued at full face value nor will it ever meet the commitment to pay the new bonds back at full face value because an insolvent nation can not do so as long as it does not have sovereignty nor print its own currency allowing a dilution via monetary expansion. A Reauters article about Standard and Poor’s statement on CAC’s addressed this subject (S&P:Greece retroactive CAC would constitute selective default – click title to read the full story) where it was stated:

Feb 10 – Standard & Poor’s Ratings Services said today that under its ratings criteria, application of retroactive “Collective Action Clauses” (CACs) affecting the timing or amount of debt service payments on outstanding Greek-law governed sovereign debt would constitute a selective default. Were such CACs implemented, Standard Poor’s would lower the sovereign credit rating (the issuer credit rating) on Greece to ‘SD’.

In the case of the Greek parliament passing legislation that would permit the amendment of Greek-law governed outstanding sovereign debt issues to retroactively include CACs, we would lower the issue ratings on debt issues concerned to ‘D’ from ‘CC’. For non-Greek-law governed sovereign debt issues unaffected by any change in Greek law, we would maintain our issue ratings on such non-Greek-law governed issues at ‘CC’, but subsequently lower the issue ratings to ‘D’ if and when they became eligible for the upcoming debt exchange. Under Standard & Poor’s criteria, an issuer’s unilateral change of the original terms and conditions of an obligation–even if not necessarily significant–may be viewed as a de facto restructuring and thus an event of default (see “Rating Implications Of Exchange Offers And Similar Restructurings, Update”, May 12, 2009).

Under our criteria, the definition of “restructuring” includes exchange offers featuring the issuance of new debt with less favorable terms than those of the original issue without what we view to be adequate offsetting compensation. “Less favorable terms” may include, for example, reduced principal amount, extended maturities, lower coupon, different currency of payment, different legal characteristics that affect debt service, or effective subordination. While we do not generally view CACs (to the extent included in an original issuance) as changing a government’s incentives to honor its full and timely payment obligations, in light of the protracted discussions over Greece’s sovereign debt we take the view that legislation leading to the Greek government’s introducing CACs to outstanding Greek sovereign debt issuances indicates a forthcoming debt restructuring, which we expect to take place in the coming weeks.

The pressure on the ratings agencies to not engage in the legal, lawful, and proper practice of placing the selective default tag on Greece’s debt will be immense. The European Union bureaucrats and banksters are busy patting themselves on the back yet nothing has changed from one day, one week, or one year ago. The nation of Greece is insolvent and by implementing a plan with direct Troika oversight that usurps the sovereignty of the nation further a spark has been lit which will ultimately lead to a nationalist fervor that will end in either revolution or withdrawal from the European Union and direct default under the new oppressive terms.

The reaction of the markets is notable however as the 1 year Greek bond yield rose to 682% before falling to 644% in early morning trade as the announcements were being made. All this means to the average person is that for the next three weeks, Greece will no longer be the headline of the day and Portugal, Ireland, Italy, Spain, Hungary, or some other nation will take its place in the short term.


(chart from

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