Keep the Bonds and Pass the Kefalograviera

Today, in a case of deja vu all over again, the equity markets were roiled by the news from Greece.  This time, the news revolved around a select group of private creditors banding together to reject the bond-swap offer that had recently been proposed.

Greek officials now estimate that between 75% and 80% of all bondholders have agreed to participate in the bond swap.  That number, while high, falls below the 90% threshold required to avoid something called the Collective-Action Clause (CAC).  The CAC is a rather interesting bit of retroactive “law” stuffed into already-existing bond contracts.  Basically, it states that, in the event a 90% participation rate is not achieved, the majority of the bondholders can get together and vote to have the agreement be binding on all bondholders.  Except the ECB.  They’re exempt, of course.

The sticky wicket here is that the CAC triggers Credit Default Swaps, since it is (by definition) a case of the debtor telling the creditor the terms in which payment will be made (or not made in this instance).  These aren’t Greek rules, rather they come from the International Swaps And Derivatives Association.

The other sticky wicket is that, if the bond swap is not successfully executed, the second Greek bailout from the ECB will not be forthcoming.  Should that be the case, Greece would likely experience a dis-orderly default.  That is contrasted with how spectacularly orderly things have gone up to this point in time.

It is also now rumored by Reuters that four Greek pension funds have decided to opt out of the bond swap.

On the bright side, this whole thing needs to be sorted out by Thursday evening.

While laying odds on the success or failure of this bond swap is not a game for the faint-of-heart, believing anything that comes from the Greek media is done at one’s own peril.  One piece of history we can rely on, however, is that when these macro issues dominate the news, correlations among asset classes tend to lock up…  and not in a good way.