So. It has come to this.
Plan after plan after plan has gone by the wayside, as has a Prime Minister, and there has been no resolution to Greece’s massive sovereign debt problem. Now Greece is quite simply out of time. After months of hysteria, we have quietly reached the edge. It’s not the end of the Eurozone, but you can see it from here.
206 billion Euros worth of debt, in the form of Greek government bonds are due for repayment at midnight Friday, Athens time. Greece does not have 206 billion Euros lying around. The newest in a long line of repayment plans will be voted upon by the bondholders (read: hundreds or thousands of banks and investment funds around the world). At 10pm Athens time, 3pm EST in America, voting closes. And then the manure hits the ventilation device.
The plan put to the bondholders is extremely complicated in the detail. The short version is that it involves swapping the existing bonds for new low-interest bonds maturing in 2042 plus 12 and 24 month bonds drawn on the European Financial Stability Facility (the bailout fund laid on by the rest of the Eurozone, predominantly Germany). Felix Salmon explains in more detail (for the finance tragics only) here. Pundits seem to think this will wipe off anywhere from 40-60% of the value of the debt, depending on how the market values the replacement long-term bonds and whether it thinks Greece can even pay back the debt with around 100 billion Euros wiped off overnight.
If 95% of bondholders vote for this plan, believing it will still get them more money back than a full default, the crisis will for now be averted. I wouldn’t bet on this option happening if I were you. A number of bondholders, large and small, have spoken vociferously against the plan. That said, lobbying will go on behind the scenes all the way to the deadline and the consortium of bondholders who helped negotiate this deal and who collectively own 40.8% of the bonds are all going to vote in favour, which is a good foundation for a yes vote.
If over 66% of bondholders vote for this plan, the Greeks have announced their intention to use the so-called “Collective Action Clauses”. This amounts to a retrospective law passed by Greece which allows them to impose the deal on holders of Greek bonds as long as the 66% approval threshold is reached.
It was part of the deal struck by the big bondholders and is meant as a weapon to cow the rest of the bondholders: if you vote no, it says, there is still no chance the Greeks will pay you in full, plus stuff will get even worse because in the eyes of the markets, Greece will have defaulted (the rating agencies and most other relevant bodies have confirmed that the Greeks exercising this option will be treated as a default- there’s not really any other way to describe it). There’s some messiness here, because the Greeks issued some of the bonds under English or Swiss law instead of Greek law, but for 86% of the bonds the Greeks can implement this plan by force.
Greece has also hinted that bondholders who vote no might find themselves left with their old bonds, on which Greece will default completely, instead of receiving the new bailout bonds like everyone else.
Why legislate away part of the debt instead of all of it? Because for one, they are trying to maintain some level of creditworthiness for the future, and for another, even after dealing with these debts they need money from the Germans and other European countries, money which will not be given if Greece refuses to repay the bonds at all.
Effectively, this option amounts to default with a plan, an orderly default under which European governments and major financial institutions will still do business with Greece, although no-one else will offer so much as a copper coin to Greece again for 20 years or more. This seems to be the most likely outcome.
If less than 66% of bondholders approve the plan, Greece defaults right here right now, 100%. Smash the shop windows and grab what you can: that would be my advice to anyone who owns Greek bonds at that point. Greece would need to somehow be removed from the Euro and return to having its own currency- which would be at high risk of undergoing the kind of inflation that sees people buying apples with wheelbarrows full of worthless notes- and no-one has any real idea how to accomplish this.
Greece would also need to adapt its depressed economy to a situation where it could not borrow foreign currency, where few foreigners would dare invest in Greece, where Greek companies would find it well-nigh impossible to get credit for anything, hardly a good way to create new growth. The economies of Europe have been interconnected and raising funds from one another and from one another’s merchant banks for almost a thousand years. Not for nothing are some calling it the Armageddon scenario. No-one knows how it will work. My best guess would be like the Russian economy in the dying days of the Soviet Union. Massive lines for basic staples, a black market using US dollars as the real currency, and a large barter economy. Good time to own a flock of chickens.
Adding to the intrigue is that Portugal, Ireland, Italy and Spain (the other four of the so-called PIIGS countries) are watching to see how much debt Greece can get away with writing off. Probably the main reason for bondholders voting against the Greek deal and risking getting no return at all on their Greek investments is that they have large investments in other PIIGS debt. If everyone decides they can get a 50% off deal, that will be worse in the long run for these bondholders than losing 100% of Greece but only writing off say 25% of the debt for the others. If you ignore what will happen to the entire European and global economies if Greece defaults, of course, which will probably not be healthy for these bondholders or anyone else.
So, stay tuned to your cable news provider at 3pm EST! When you’re talking to your kids or grand-kids in your nice warm comfy cave in 10 years, you want to be able to tell them exactly where you were when the news of the Fall first filtered through, right?
Update: According to Reuters an acceptance rate of 95% is believed to have been achieved with an hour left to go.
(Image via K_Dafalias @ flickr)
