Squeeze Is On for Greece’s Private Sector Creditors

Here’s a thread for people to discuss the latest stories (here and here) on Greece’s private sector creditors being asked to roll over their funds or else. A quick summary:

The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone’s sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece’s financing gap over the next three years, they said.

“Private investors would have a strong incentive to participate, because if they don’t, there will be a default,” said one official.

It’s the Don Corleone approach to default negotiation, involving making people offers they can’t resist.

Still, providers of CDS insurance will be thrilled to hear that

the debt-exchange process envisioned by the governments won’t rewrite existing bond contracts or trigger a credit event, the officials said, partly easing the ECB’s concerns that private creditors are being forced to contribute financing.

Can someone explain to me why it’s so important to the ECB or any government whether a restructuring scheme constitutes a credit event for CDS purposes? Are the firms that offer this insurance somehow more important sources of systemic risk than those who own Greek sovereign bonds? Or is it more for the appearance of purity — “it was not a default, now way, sure the CDS guys say it wasn’t a credit event”, that kind of thing?

Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?

47 replies on “Squeeze Is On for Greece’s Private Sector Creditors”

@ Karl

on the CDS issue, as well as the systemic banking issue – is there cross default implications on a sovereign default, ie if the sovereign defaults, all sovereign guarantees can be called in?

@ EB

I don’t know. You tell me. Why would the judgment of CDS providers be the crucial determinant of how various legal contracts relating to Greek debt operate? (Beyond that is, those who have bought CDS insurance, obviously.)

We know from the Buchheit-Gulati that restructuring Greek debt is not that complicated as a legal matter and CDS don’t feature in their discussion if I remember.


@ Karl Whelan

I posted the WSJ link on the Donal Donovan thread a little while ago together with this Alphaville link which provides a very informative background.


UBS’s Justin Knight has it about right, in my opinion. What constitutes a “credit event” will be decisive. A game of high stakes poker among the three main protagonists (i) ECB (ii) Berlin and (iii) the markets (in particular that for CDS). The definition of a “credit event” lies with the association of private parties involved in the CDS market.

The whole point of the exercise is in bringing in holders of sovereign and banking bond who do not wish to “walk away”, especially the latter. Unless Hibernia is about to sink beneath the waves, we need a retail banking system and we now have a two pillar structure ready to go and capable of making a tidy profit.

It really doesn’t look as if it is anything to do with the intricacies of Greek debt. The ECB has invested its reputation in a “no default” bright line, and any CDS credit event will cross that line.

@ BeeCeeTee

All any bank, and especially a central bank, has is its reputation and once lost, it can be impossible to recover. We ought to know! Certainly the Germans do.

Incidentally, for those with an FT subscription, entering ESM as a search will throw up the detailed articles on the background to the negotiations.


thanks for asking the CDS question so openly because all the reasons I could come up with have never convinced me. Pride? European banks that issued them, but American hedge fonds that own them now? Contagion (why is that related to CDS, and not to the default causing the CDS to trigger?)?

I look forward to hearing other ideas.

@ Karl

Well it would probably be the same organisation, ISDA, ruling on both CDS contracts.as well as cross default clauses, so a ruling on one would probably automatically rule on the other. That said, BeCeeTee raises an interesting point – does a hard default limit the ECB’s operations more than a soft default, ie legally prevent them from offering liquidity, or revaluing some of the collateral on their books automatically rather than claiming some hold to maturity alchemy etc?


The “importance” of the cds trigger is more than just the writers being favoured.

The ECB is not far off resignation teritory if it is demonstrated to fail to manage risk on its balance sheet via acceptance and collateral safeguards for repos. It is determined to retaain the “out” that there are no defaults – whatever you want that to mean.

Thus the ECB wants CDS holders to be shafted.

They have an ally in the politicians of the EU. The EU parliament and socialist leaders within it have invested a lot of political capital – back to 2008 – in blaming CDS “spivs” for declines in all sorts of asset prices but particularly bank shares, bonds and sov bonds.

Both these parties are after the same thing and the politicians are not as smart as the ecb, so are being played somewhat.

This gives a bit of flavour:

Se also links here, may assist with political context.

Won’t this take Greece out of the sovereign debt market for a longer period of time, and consequently keep us of the pitch for longer?

The net Greek (and other) CDS numbers, such as they’re available, can be accessed on http://www.dtcc.com/products/derivserv/data_table_i.php?tbid=5. DTCC is reckoned to be the biggest CDS clearing house, but I’ve no idea what percentage of the market they represent. Latest number for open interest is $5.207bn (out of a gross $76bn).

Seemed to be a big panic over last few weeks that a Greek restructuring wouldn’t be a credit event, then a panic that it would. Makes one wonder firstly – what are CDS for? Secondly, is the CDS market too big to fail, or too big to succeed?

One of the dopiest events I can recall in CDS was in Fannie Mae and Freddie Mac, where a credit event was declared despite bondholders losing not a red cent – the writers had to pony up.

At press rooms across the continent, sub-eds scramble to get a Trojan Horse reference in there somewhere ….

What’s all the cospiracy stuff about? This is very simple. The Greek private sector is being asked to stomp up. It has nothing to do with protecting CDS writers or avoiding default at all costs. It is quite a logical attempt to target the burden at Greeks. Budget deficits are first and foremost a tramsfer from the government sector to the domestic private sector. To ask the “bail out” of the government sector to be shared across Europe is to let the Greek private sector away with a windfall.

In the case of the Greeks, the private sector mostly blew their windfalls on trade deficits. Not so Ireland. Ireland has a current acoount surplus and so the budget deficits are accumulating as huge financial surpluses of the Irish private sector. Note the large holdings of international assets by pension funds etc.

One could even see a situation where the EU would require domestic legislation to enforce by law restructuring on domestic holders of sovereign debt. I suspect that this latest development will push Irish institutions to dump Irish bonds at any price.

Let’s see. Who has large quantities of unhedged Greek sovereigns, that can’t afford to take write-down, that would have to be bailed out by eurozone governments?

On a secondary level, who is also exposed to counterparties that are dependent on there not being a credit event?

All roads lead to the ECB.

Independent central banks are a monster at the heart of democracies.

On a side note, I think Greece’s exit from not just the euro, but the EU must be a real risk at this stage. Popular discontent with measures prescribed by european ‘partners’ must be reaching a point where this is likely, however justified those measures might be.

From this thread:

“Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?”

From the previous thread:

“Investors who bought these bonds at steep discounts over the past year (because so many people assumed the government would not pay out on them) will have obtained a fantastic rate of return.”


I think this won’t be the last time that the phrase “so many people assumed the government would not pay out on them” will be used on this site. Looked at objectively, the odds must be very considerably less for holders of Irish sovereign bonds than for holders of these Anglo bonds. After all, not much reputational or collateral damage would be done by a default on Anglo bonds, but massive reputational and collateral damage would be done by a default on soverign bonds. If the government didn’t cave in to the mob on the Anglo bonds, why should anyone expect them to do so on the soverign bonds?

Meantime, Irish holders of UK sovereign bonds continue to take a massive hit, thanks to the 25 per cent devaluation of sterling v the euro since 2007, UK inflation approaching 5 per cent, and the consequent likelihood of further sterling devaluation. The plight of these unfortunates within our society is not receiving adequate attention from the Irish media or on this site. I hope this will be rectified soon.

“Anyway, what odds are there now that holders of Irish sovereign bonds will walk away unscathed?”

10 year bond yields down so answer is that the market thinks Irish default/restructuring is less likely than before this development.

That is probably correct for foreign holders. Domestic holders would appear to be in a worse place and maybe the Bank Holiday is distorting supply and demand.

@BW2: “10 year bond yields down so answer is that the market thinks Irish default/restructuring is less likely than before this development.”

To my mind that’s not a valid inference. Greek default, which is what we’re talking about whether or not it constitutes a CDS event, surely makes Irish default that much more likely. But it is also more likely that any default will take the form of a maturity extension (possibly labelled “voluntary”) rather than a simple haircut. That being so, Irish 10-years are probably a better buy than they were on Friday.

Note that the Greek 10-year has also improved. Does that mean the market thinks Greek default is now less likely?

There’s a widespread impression that talk of default scares creditors. Speaking as a creditor, I far prefer to see the troika facing facts. Debtors who acknowledge their problems are likely to do a better job of solving them. People like Lorenzo Bini-Smaghi are not helping anyone, debtors or creditors, by spinning stories of will-power as the remedy for all ills.

I think JTO is owed an apology from all those who sneered at him last week regarding his purchase of bonds (including Karl Whelan who insisted he didn’t know what he was talking about and must obviously have had a savings account). Notwithstanding the current market price of the bonds it must now be obvious to all that there will not be a default and JTO will be sitting on a large profit – just like those Anglo bondholders repaid recently (see NWL for this story).

Bunbury I got the impression Jto was quite clear that he had simply asked the retail advisor at Ulster Bank to “invest” savings in Irl rather than UK or Europe, and that he had never dealt a bond and wouldn’t know how to. The bloke in Ulster Bank had, by the looks of it, placed the funds in some sort of cash deposit account in Irl. No bonds involved. If there had been Irish government bonds bought, there would be a large paper loss on them. If Irish bank senior bonds had been bought then no loss. There is an fx component between Uk and Irl but not between Irl and EZ.

Can you clarify what Karl, or anybody else is supposed to be considering apologising for?

@ All

Not being an expert in this area, I can only observe the players and try to deduce what their next move will be. The German finance ministry non-paper, to which there are numerous references in the German press, evidently drew on another paper from Deutsche Bank entitled, helpfully, “Proposal for Greek liability management exercise – burdensharing without haircuts”.

Felix Salmon of Reuters had this commentary some time ago on his blog.


It seems to me to put the spotlight on the real difficulty: Greece is insolvent. The current debate may hide the fact from the general public for longer but the markets take a less sanguine view.

The ECB view (i.e. variation in maturities to avoid bunching of repayment) will probably prevail. Circulating non-papers on a restricted basis to the popular media in Germany is no way to run a railroad just days away from final decisions.

The improvement in bond spreads can only be attributable to the fact that markets are beginning to realise that whatever else is on the cards in the immediate future, a sovereign default is not one of them.

“In the case of the Greeks, the private sector mostly blew their windfalls on trade deficits. Not so Ireland. Ireland has a current acoount surplus and so the budget deficits are accumulating as huge financial surpluses of the Irish private sector. ”
Rubbish, fiddlesticks and nonsense.
A small CA surplus in Q4 2009 and decent surpluses in Q3 & Q4 2010, but it is quarterly deficits otherwise back to 2004 and even including the surpluses in 2010, it is annual CA deficits back to 2000…

What is the difference between us again? Oh yeah, we masked our structural problems with a massive property bubble and imported private sector capital… the mask has slipped…

The details don’t matter. The only thing that matters is that Geithner has ordered that Europe must take no action that would threaten credit default swops. End of story.

@ KD

Thanks for the correction, I erroneously said less “likely” when I meant less “scathing” which was the intended answer to the original question. The markets probably believe that a “scathing” is now more likely but paradoxically less threatening.

But do others not agree with me that the really big development here is that default/restructuring will as far as possible be targetted at the private sector of the offending country minimising any pan European impact.

I think it is very clever. It was always going to be unacceptable to allow countries whose citizens have gorged themselves on the back of their governments’ deficits to enjoy a pan European bail out.

In short, certainly in the case of Ireland, the government is broke but the citizenry are not. The EU will attempt as far as possible to target any government defaults at their own citizens, and who can argue with that?

@ Hog

So what is financing the enormous amounts of foreign assets in Irish pension funds and insurance companies?

The fact remains that the government spent their deficits on us. We either blew it on Mercs or we acquired foreign assets. Either way we are never going to have an EU solution which lets our government off the hook whilst leaving us with our Mercs and foreign asssets.

The banking situation is a more complex matter but the bulk of our debt problem is of fiscal origin.


I think you are misreading these stories. “Greece’s private sector creditors”, on my reading, would surely include many foreign creditors. They will all be in the same position as Don Corleone’s unfortunate band-leader.


“But do others not agree with me that the really big development here is that default/restructuring will as far as possible be targetted at the private sector of the offending country minimising any pan European impact.”

….private sector of the offending country?? Can you explain, it looks like any holder of sov bonds – at least those that need to repo (if the ecb angle is correct). Irish gilts are held by…….

There is no proper market/trading system, nor clearing house for CDSs. The market is horrendously opaque, and as we found out during the sup prime crisis, hedges are written on hedges on hedges. No one really knows the effect of some of them being called in, thus those in charge of financial stability get very nervous about them. That 3 years into ‘the crisis’, there’s been no attempt to create an information rich clearing system, says a lot about the competence of those charged with addressing the crisis.

@Karl Whelan

I knew very little abouts CDS before your post. Now that I know a little more, my advice is to keep digging on this one.

Is it possible that there are hundreds of billions of naked CDS on all the bank and sovereign bonds of the weaker EZ countries. The sellers of the CDS could be on both sides of the Atlantic, hence Geithner’s intervention.

They could also be very powerful EZ banks and insurance companies that would go belly up if these naked cds well called in through the so called and very ill defined ‘credit event’.

Is is possible that we could be talking about trillions here? Trillions of CDS held by gamblers?
I cannot understand why these naked CDS have not banned years ago.

Has some part of the crumbling architecture fallen on our Florentine friend, Lorenzo Bini Smaghi who told a conference in Berlin today

“The basic rationale behind involving private creditors when a debtor is in distress is straightforward and uncontroversial: creditors and investors should bear the consequences of their decisions as fully as possible and should not rely on taxpayers’ money to be bailed out. [3] The underlying reason has long existed: a bailout by taxpayers today may encourage risky lending by private investors in the future.”


What next? Minister Noonan insisting senior bondholders be bailed out?

@ Joseph Ryan



@ Brian Woods II

I agree! It is a source of continuing astonishment to me that not alone many on this blog but the Irish public in general seem unwilling to face up to the reality you outline. There were winners and losers from the Irish economic bubble and many of the winners still have most of their gains, and/or their jobs/pensions, and the taxpayers of other countries are not about to step to compensate the losers for the fact. It reminds me of the comment, the author of which I cannot recall, to the effect that there is nothing more unsettling than the sight of your neighbour getting rich.

Or, as Colm McCarthy points out in yesterday’s Sindo, of the sight of a neighbour with a guaranteed jobs while many have no hope of getting one.


Getting through this wall of self-willed myopia is the real challenge facing the country. What is most disconcerting is the fact that many in the new government, including the two party leaders if their utterances are any guide, seem blissfully unaware of it. Until reality sinks home, Ireland as a nation will not be taken seriously in the counsels that matter.

@ KD, grumpy

Yes, I could be misreading it. But “the country’s private sector creditors” is a strange phrase. Are we referring to the “country’s private sector” or to the “country’s creditors” which are non governmental? For a start how many Greek bonds are held by foreign governments?

Somehow the more blanket interpretation makes less sense. It would indeed seem to be dedicated to protecting CDS writers but, call me naive, I can’t belive that to be an overarching ECB priority.

As to the suasion of the threat of default, it is hard to see how that would bring everybody on board. However the threat of Armageddon for Greece would be a very powerful tool for the government to persuade, indeed, enforce its domestic institutions to play ball.

If it was not meant as I initially interpreted it can I humbly suggest that it should do, seems perfectly reasonable to me.


You should be warned. That is the first time I have got agreement on this blog! Can everybody else be wrong?


See the WSJ article which Karl Whelan links to:

The exchange offer will be targeted at all Greek bond holders, not just Greek banks, one official said.

“You’d need to focus on Greek and non-Greek creditors,” he said. “It’s unfair if you don’t, and [otherwise] it’s also probably impossible to administer the program.”

As someone mentioned above, the word came from Timmy. This all about kicking the can until Obama is re-elected. Headlines screaming that Greece defaulted would spook any number of entities, including the American voter. So, everything is being done, just like in the US (remember CDS and Lehman Brothers) to forestall a reckoning of monumental proportions.

If this were to fall apart President Palin would be bouncing off the walls of that white house on Pennsylvania Ave.

There is one little detail that Timmy does not have control over and that is the Greek people themselves. That is the only game in town.


“call me naive, I can’t belive that to be an overarching ECB priority”

EZ politicians investigated cds wiith a view to banning. A few weeks ago they backed down since the conclusions were they were mainly used for hedging by banks to facilitate liquidity.

The sop to the anti-speculator brigade is avoiding the triggers. Suits the ECB too.


Lozza BS really is a pillock.

@Jagdip Singh, Joseph Ryan

After reading the full speech my impression is that Lorenzo Bini-Smaghi isn’t giving an inch. Either he’s out of the loop or the whole idea of squeezing private-sector creditors is still just kite-flying.

As I plod along there seem to be two very large known unkowns that are used to trump your common or garden knowns.

They are:

(1) The risk of contagion (otherwise known as the lurgy). “I’m against simple restructuring, as the risks are unknowable, and I have a hunch, there’s the contagion possibility,” said Jean-Claude Juncker.

He has a hunch you know. Any offers on (a) what is the probability of contagion if sovereign debt is restructured?, and (b) What are the consequences of contagion happening?

(2) CDS. From good old wikipedia referencing ISDA:

“Credit default swaps have existed since the early 1990s, but the market increased tremendously starting in 2003. By the end of 2007, the outstanding amount was $62.2 trillion, falling to $38.6 trillion by the end of 2008.”

ISDA, by the way in my world is the Irish Student Drama Association, which gives me an odd sort of mental image of it.

So a very recent instrument that is pretty much unregulated (though thanks for attempts to quantify above), can now cause so much anxiety as to dictate inter-governmental policy.

Why is the Greek government responsible for parties unknown to them who have bet that they will fail? This is like a bookie tellling a not-that-great boxer that he has to go down because the bookies can’t afford to pay out on the bets that have been taken on the fight. If the answer is that the boxer has to take a dive for the good of the sport as a whole, then the boxer should KO the sucker in front of him.

Re burdensharing without haircuts.
The difficulty with this approach is the attitude of the rating agencies. As they have indicated they will view this so called soft default as a credit event and further downgrade the existing sovereigns into minus junk, then the new bonds are likely to suffer the same fate. The market reaction is odd. It looks like a stage managed setup and I would not be surprised if the ECB are busy buying to drive down yields ahead of the announcement.

@Jagdip Singh
It’s an astonishing statement. Does he take us all for fools?

The Irish government has acted like a pack of clowns, and by this I don’t mean the elected ones, over the last 2 to 3 years. Why would they not take us this time again as clowns, fools, and knaves?

@ Ceteris paribus

I agree. However, it seems to me that there must be a doubt about the political seriousness with which the idea has been advanced. It seems to have more to do with ensuring a majority in the CDU-FDP coalition that anything else.

I have used the parallel of a lot of trains arriving in the station simultaneously, one, the Greek, being somewhat out of control. The others include the finalisation of the text of the ESM, the increase in the lending capacity of the EFSF, the conclusion of the negotiations with the European Parliament for the “six-pack” of measures on strengthening the SGP, the bank stress tests and, finally, the possible first steps by the ECB to end its non-standard measures (including a probable rise in rates next month).

I think that there will be a deal simply because there is little choice but to reach one.

LBS is being lambasted on another thread for his most recent speech, his critics failing to see that what he is doing is negotiating, at one remove, on behalf of the ECB, a workable outcome to the issues still in dispute in the text of the ESM treaty, the actual practical details of which are being worked out – by an accident of history – in real time in the context of the second Greek bailout.

I presume that CDS are not all mere roulette plays and that there is in fact a lot of wholesome hedging activity. Why on earth would any holder of Greek debt which it has hedged by CDS “volunteer” a restructuring which invalidated the hedge?

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