Bloomberg News

Greek Collective Action Concern Triggers Slump in March Notes

February 24, 2012

Feb. 23 (Bloomberg) -- Greece’s government notes maturing next month fell on concern the nation will force losses on bondholders by implementing and triggering so-called collective action clauses.

The nation’s 4.3 percent notes due on March 20 were trading at 26.75 percent of face value at 11:37 a.m. London time, compared with 42 a week ago. The use of CACs will trigger payouts on credit-default swaps insuring Greek debt and the contracts now signal a 93 percent probability of default.

Hedge funds bought bonds due next month betting there wouldn’t be time for CACs to be introduced before the debt matured and that they’d be paid in full. Prime Minister Lucas Papademos’s administration will submit the necessary legislation to the Athens parliament today as part of the 130 billion-euro ($170 billion) bailout agreed with the European Union.

“Those who bought the bond in the hope of a free ride are now paying the price,” said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale SA in Paris. “The desire from politicians to avoid CACs is not as strong as it had been.”

Greece is seeking to reduce its debt to 120 percent of gross domestic product by 2020 from 160 percent last year. An agreed debt-swap, known as private-sector involvement, or PSI, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.

Debt Goals

“As almost universal PSI participation is crucial to stay on track and get close to the official debt reduction goals, we believe that collective action clauses will likely be deployed and used,” Daniele Antonucci, Paolo Batori and Robert Tancsa, Morgan Stanley analysts in London, wrote in a note to investors.

The nation must repay 14.5 billion euros of bonds in March and a subsequent credit event caused by the implementation of CACs will trigger payouts on $3.2 billion of default swaps. A total of 4,263 contracts were outstanding as of Feb. 17, according to the Depository Trust & Clearing Corp., which runs a central registry for the market.

It now costs $7.2 million upfront and $100,000 annually to insure $10 million of Greek debt for five years, according to CMA. The 93 percent probability of default within that time assumes investors recover 22 percent of their holdings.

Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporters on this story: Paul Dobson in London at; Abigail Moses in London at

To contact the editors responsible for this story: Daniel Tilles at; Paul Armstrong at

Tim Cook's Reboot
blog comments powered by Disqus