Greek debt crisis countdown from IlliquidX

IlliquidX, the distressed debt platform which offers clients trading in stressed and/or defaulted debt; high yield debt; illiquid structured products and illiquid equities and convertible bonds, has constructed a timeline on proposed solutions to the Greek debt crisis.

This week’s focus has been on the “French proposal” regarding debt rollovers. Under the proposal, 50% of Greek debt held by financial institutions maturing in the next three years would be swapped for new 30-year Greek bonds.

These would pay a coupon of about 5.5%, receive a “bonus coupon” as a sweetener linked to the rate of Greece’s GDP — potentially worth up to 2.5 percentage points — and could even come with an EIB or EFSF guarantee and be AAA rated.

Another 20% would be invested in a SPV that would serve as collateral for the banks. However, a voluntary rollover seems more like a pure liquidity solution, since it doesn’t help the debt/GDP ratio. It is yet unclear what would happen to the remaining 30% of the debt.

At the same time, three issues need to be considered from bondholders’ perspective: the net present value (NPV) impact, accounting treatment of the rolled over securities and liquidity considerations. The transaction appears to be NPV positive on aggregate for bondholders participating in the rollover process, which acts as an incentive to encourage a large participation rate.

However, the exercise would entail an accounting loss for hold to maturity books, as the new securities would need to be marked at the fair market price. In addition, liquidity considerations would also make banks reluctant to tie in liquidity for a long period of 30 years.

Making matters worse, the rating agencies are threatening to deem Greece in default if the EU goes ahead with such a plan and the prospect of triggering the CDS is imminent. According to a senior finance official, the ECB will rely on the principle of using the best rating available from the major rating agencies (S&P, Moody’s and Fitch) and will continue to accept Greek debt as collateral for loans unless all of them declare it to be in default.

With the whole country living with political unrest, uncertainty and fear that Greece could – perhaps in a year from now – end up being forced out of the euro zone or taking the exit option on a semi-voluntary basis, anecdotal evidence is starting to emerge that apart from continued capital flight, Greek citizens are frontloading Swiss francs, gold coins and other safe, but liquid assets.

The latest figures released by the central bank, from the end of April, show that domestic deposits declined by about €12bn over the first four months of the year to €197bn.

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