The ongoing Greek debt issue will likely become a Mexican standoff – with the banks of Europe on one side, the Greek government on another side, and the European Central Bank on the other. Ultimately a number of brave investors have bought into this dangerous game thinking they can force the other parties to blink. The wager here is that these new entrants (hedge fund investors and institutions) are wrong.
Players in the Greek Debt Issue
The major players in the Greek debt issue are some of the major national banks in Europe, a group of hedge fund investors and institutions, the European Central Bank, and the Greek government. Each of the players (save the Greek government) has some skin in the game which hopes to avoid default. It is for this reason that some new investors in Greek debt have scooped up some of the bonds at a steep discount. It is their belief that all the other parties involved have enough of a vested interest in the high stakes game to make sure Greece does not involuntarily default on their debts. While it may be true that most everyone involved wants to see Greece skate through with a lower debt level after the Greek debt issue is over, the bone of contention the investor group is worried about is “Just how much is that haircut going to be?”
This is a very valid question.
Talks on Greek Debt Issue Focused on Halving Debt Level
Talks in the news today (and for the past few weeks) have centered around the possibility of a voluntary agreement to write down the bonds outstanding to around 50% of the face value. Given the bonds have traded at a steep discount for some time any agreement on a refinancing at this level would result in an exchange of old debt for new debt. A recent quote from the NY Times indicated that investors were now more concerned with the coupon rate of the new issue bonds would be. Obviously the higher the rate the more valuable (up to a point) the bonds would be. My guess here is that the investor group’s profitability hinges on a favorable rate scenario. One might surmise that by biding their time the ECB rate will continue to fall while the Greek debt issue (amongst other issues) continues to hamstring the economic recovery.
From my perspective that’s not a bad bet, all else ignored. Problem is there are other competing factors which simple can’t be over-looked. While time may appear to be an ally of the investors, some of those hedge funds and institutions I’m sure have soft spots where they can be hurt – by changing margin requirements and the costs of treading water (interest costs and potential market disequilibrium / illiquidity) – which could seriously compromise their positions and force them to blink.
My thinking is that the 800LB gorrilla in the room is the ECB, and I have to believe they have the resources and willingness to out-wait the other players in the Greek debt issue.