46 Days to Avoid Greek Default

The Wall Street Journal

JANUARY 16, 2012, 5:22 AM

… news from Athens that the debt-restructuring talks there have been suspended should really be of bigger concern…

… Greece has a €14.4 billion bond maturing on March 20 that it can’t afford to pay in full,…

… We’ll go through those steps one by one…

… It first has to come to an agreement with its private-sector creditors…

… For the deal to be consummated, Greece’s not-too-happy euro-zone peers have to sign off on sending some €60 billion its way…

… it will need €30 billion to recapitalize its own banks… and another €30 billion to give to the wounded bondholders as an upfront cash sweetener…

While the market was moving on news that Standard & Poor’s had downgraded nine euro-area countries, including triple-A France, news from Athens that the debt-restructuring talks there have been suspended should really be of bigger concern to market participants and policy makers.

Greece has very little time left to complete the restructuring of its debt and avoid a “hard” default.

The latest from the Greek capital Monday was that talks would resume with a view to having a deal in place by Feb. 23, when euro-zone finance ministers will be meeting.

Here’s why it’s crucial that the deal is done as soon as possible, and why the schedule of 46 working days –including today- that Greece, the private sector, the euro zone and the International Monetary Fund have to complete it is very tight indeed.

Greece has a €14.4 billion bond maturing on March 20 that it can’t afford to pay in full, but the steps to be taken between now and then are many, technical, difficult and large.

We’ll go through those steps one by one, but before we do, it should be clear that if Greece doesn’t manage to complete the restructuring by March 20, it will go into a hard default. While the market has largely priced in this eventuality, the fulfillment of the scenario is ultimately unpredictable.

It first has to come to an agreement with its private-sector creditors. These talks have just been suspended and are said to resume next Wednesday.

If it doesn’t get high enough participation, Greece will likely force the rest of the creditors into the deal–making it an involuntary restructuring that most likely will trigger credit-default swap contracts.

In order to have the involuntary path available to it, Greece also needs to pass a law through parliament that will retrofit its bonds with collective-action clauses.

Greece must also publish a term sheet detailing the characteristics of the bonds it will offer (yield, maturity, etc.) and invite its bondholders to tender their bonds and receive the new ones.

Then the bondholders have to reflect on the deal for a while before formally accepting it–or indeed rejecting it.

In the eventuality of a forced restructuring, the country would have to physically hold a vote among creditors to ensure that a majority is on board, thus making use of the CACs to bind in the minority opposing the deal.

This is the stage where some creditors are likely to begin litigation processes against the country on various grounds.

Assuming all has gone smoothly thus far–or even that the CACs have been used and the minority bondholders have been forced in–the deal has to be consummated, i.e., bondholders must give Greece their old bonds and get new ones.

For the deal to be consummated, Greece’s not-too-happy euro-zone peers have to sign off on sending some €60 billion its way. Why? Because it will need €30 billion to recapitalize its own banks that will face collapse after they take the losses in their holdings of Greek debt and another €30 billion to give to the wounded bondholders as an upfront cash sweetener.

We are told the euro-zone countries will discuss these rather large disbursements at their Jan. 30 summit.

So after the euro-zone countries have signed off on the funds and Greece has actually received them, the bond exchange can go forward.

It’s difficult to estimate how long each of the above steps will take but it’s clear that there are several things that could go wrong between today and March 19.

It should be noted that the completion of the Greek debt restructuring within the next 46 working days by no means implies that Greece is rescued, or that its debt is on a trajectory towards becoming sustainable. It merely means that the imminent threat of hard default is averted.

A final note: because Greece’s bonds don’t have so-called cross-default clauses written in them, if Greece were unable to repay its March 20 maturity, it would go into a form of a “mini-default”–at least technically speaking. The event, however, would still trigger CDS contracts on some chunks of debt. It would illustrate the almost untenable position Greece is in and would spook the market as a preview of what a Greek disaster might look like. It would also likely make the rest of the vulnerable euro-zone bond markets jittery and could cost a Greek bank or two its viability.

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