Saturday, December 8, 2012

Choose-Your-Own Adventure: The Greek Default Edition!

Bond market geeks at BNP Paribas churned out this fantastic chart showing how the ever unfolding European choose-your-own-adventure could play out. It’s really helpful, but it needs a bit of translation for, as the ancient Greeks would say, the�hoi polloi. So we’ll give you a quick translation below.

BNP Paribas
  • Launch of tender offer = Greek government goes to investors and says we want you to trade in your old bonds for these new ones that yield less.
  • PSI=Private sector involvement, the process of getting banks, hedge funds and other investors to agree to lower yields on their bonds than originally agreed to. This is kind of the soft, fuzzy version of default. A “hard default” is essentially Greece just saying it won’t pay, period.
  • CACs= Collective action clauses, a piece of legal language in bond contracts that makes it easier �for the debtor to change the terms of the bond payments. Under a collective-action clause, a group of bondholders (typically two-thirds or three-quarters) can agree to impose losses on everyone else. Greece has been talking about �passing legislation introducing collective-action clauses and retroactively applying it to outstanding debt.
  • CDS=Credit Default Swaps, essentially insurance contracts on government debt. In theory they would pay investors who bought them, if Greece defaults. But some suspect these contracts might not actually pay investors, if enough investors “voluntarily” agree to accept new repayment terms on their Greek bonds.

Any other questions on the chart? Toss ‘em in the comments section and I’ll try to dig up some answers.

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