Put Greece out of its misery. Well, they shoot horses don’t they?

A crazy sense of déjà vu has happened with the Greek debt issue kicked down the road again. But the use of retrospective CAC’s and the message this gives the finance world means that the kindest solution is only round the corner isn’t it?

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When will this end?
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Simon Miller
On 9 March 2012 11:17

Can I say it once again? Despite the bond swap deal, the crisis has been kicked down the road.

How many times are we to see this played out like some putrid mini-episode on the red button spinning around in constant replay until you find the remote?

So some 85 percent of creditors have agreed to the bond swap in Greece. The likelihood is that it will get its second tranche of money but why should anyone believe that this is the end of the matter? How can anyone not believe that this is, at best, a reprieve for Greece?

And that is without the knock-on effects to Portugal or Spain.

If, as is likely, the International Swaps and Derivatives Association decrees that the activation of collective action clauses (CAC) is a credit event in a few hours’ time then credit default swaps could be triggered – although analysts are unsure about whether the default has already been priced in.

If CDS’s are triggered then guess whose insurance companies will be among those that will be leveraged?

Portugal’s and Spain’s. Yep, these struggling countries facing problems of their own will see their insurance companies take this hit. It is no wonder that those companies went running to grab the cash that the European Central bank has splurged out recently in a bid to keep the bloated corpse moving.

And these CAC’s. What on earth did the paymasters think they were doing allowing Greek politicians to retrospectively change contract law? Most ‘English-law’ bonds have CAC’s written in them at the time of contract – bondholders know what they are signing. To introduce these post-signing begs the question as to what message does that give out to creditors?  That the eurozone’s word, ironically, isn’t their bond?

You can understand their political need to keep the project going at any cost - and boy what a cost – but why didn’t anyone point out that bondholders take a pretty dim view when contracts are changed post-signing. Why on earth would any investor want to trust a bond from say Portugal or Spain now? Let alone Greece which is effectively shut out of the market and dependent on its masters in Brussels and Berlin.

And guess what – it is not enough. What? I hear you say. Not enough? But all these haircuts, this punishing knock-on effect for other periphery countries?

Well, you see, Greece is actually short by €3.4bn. Following the voluntary participations and CACs there are still foreign-law bonds being held by refuseniks who have been offered an extension to March 23rd to participate.

Now, as I said above, Greece will get its money, after all there have been more expensive fudges than for €3.4bn. But there is the delightful proposition of embarrassing court proceedings over around £3.2bn in defaults.

It is peanuts in the scheme of things but Greece has to think extremely carefully about what it does next. If these ‘holder-outers’ maintain their stance past the cut-off date then proceedings could easily last ten years. After all Argentina is still fighting court action over its debt after it went bankrupt in the largest default in history at the beginning of the millennia.

But can Greece just buy off these debt holders? Financially that’s easy enough – it’s a newspaper on an annoying wasp - but it is politically embarrassing and economically stupid because of the message it will give to pension funds, foreign investors and banks who have taken the 75 percent hit – should have held on.

And that message will pass on to bondholders in other periphery countries - should have held on.

As I have noted before, this is a sticking plaster on a festering wound, with 51 percent youth unemployment, a shrinking economy and further hardships to come, this delays the inevitable.

All this reminds me of the famous film, written by Alfred Hitchcock and directed by Sidney Poitier, where a couple meet and enter a grueling dance marathon. The girl tries to convince the boy to end her life and put her out of her misery.

It does seem that we are seeing a grim dance to the death but with no-one willing to pull the trigger. After all, they shoot horses don’t they?

Simon Miller is the Editor of Financial Risks Today. He tweets @simontm71

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