The willing participation chapter of the Private Sector Involvement (PSI) exercise to alleviate the Greek sovereign debt by €107 billion expires at 22:00 Greek time (CET +1) on 8 March. Holders of a total value of €206bn of Greek bonds are being requested to participate in this exercise, which comprises a 'haircut' of 53.5% of the nominal value of their titles.
In exchange, holders will receive new bonds under the English law guaranteed by the European Financial Stability Facility (EFSF) to the value of 31.5% plus a cash bonus of 15% of what they now hold. The International Institute of Finance (IIF), which negotiated this swap, has confirmed that the following members of its Co-ordination Committee have already announced they are going to participate: Allianz, Alpha Bank, Axa, BNP Paris Bas, CNP Assurances, Commerzbank, Deutsche Bank, Eurobank EFG, Greylock Capital, ING Bank, Intesa San Paolo and National Bank of Greece.
In addition, almost all the German banks that hold Greek debt are reportedly ready to participate. Sources indicate that IIF members of hold a nominal value of €80bn worth of bonds between them – the German bank FMS Wertmanagement, which has the largest exposure in the Greek problem, holds bonds of €8bn and is reportedly willing to participate in the PSI.
Greek Finance Minister Evagelos Venizelos said that he expects 90% of bond holders to participate, adding that there will be no better offer made. According to what was known before now, if willing participation exceeds 50% and reaches 60-65%, the Greek government will activate the Collective Action Closes (CACs), forcing the remaining credit-holders to participate, without running the risk of sparking a ‘credit event’.
A general assembly is currently being held in Athens for every one of the 80 bonds in circulation, with holders voting ‘Yes’ or ‘No’ to the swap but, as in every corporate general assembly, the qualified majority imposes its will on the minority and this is what is actually taking place now in Athens.
Most of the prudent holders of Greek bonds have already written off almost three-quarters of the nominal value of the bonds that they hold, following the mark to market principle of asset evaluation. Greek bonds were sold and bought in the secondary market at discounts reaching 65%. As a result, the actual value of those assets is around one third of their nominal value.
However, all Greek bonds held by the European Central Bank (ECB) and the national central banks are exempt from PSI participation obligation. This is exactly what the reluctant participatants are going to use as an argument to establish that a credit event is taking place and, consequently, why they should be fully covered by the Credit Default Swaps they hold.
Some weeks ago, the Greek bonds held by the ECB and the national central banks were given new ISIN code numbers so that they would be made exempt. However, if the PSI exercise leaves a 'gap' and the reduction of the Greek debt does not reach the €107bn benchmark demanded by the IMF, there is an indication that the difference will be covered by the partial participation of the ECB and its constituent national banks in the PSI, in a way that will not resemble direct aid from central banks to the Greek government.