Peter Tchir

A Greek default doesn’t need to be chaotic

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The rhetoric coming out of Greece has reached a fever pitch.

Papademos and Samaras are both out their creating dire images of a post apocalyptic Greek state if a default occurs. Maybe it is a good time to remember what Papademos’ job is. He wasn’t elected. He doesn’t represent the Greek people in a fashion that we are used to – running for election and winning the election. He was foisted on the Greek people by the EU – the very people he is going through the motions of negotiating with. His JOB was to get the Greeks to accept what the EU wants. If he isn’t the most conflicted politician of all time, he is right up there.

Samaras may believe it, or may have decided this is his best route to power when the vote is passed and the Greek people decide to kick Papademos out (remember, he was never voted in).

Either of them would be more credible if they made any attempt to explain why it would be so disastrous. So far, not one basic fact to support the chaos theory has been given. I will admit that if Greece defaults without any preparation, it would be extremely ugly, but there is no reason not to be prepared.

So, if I was the Greek Finance Minister (I would probably have a longer last name, with more vowels) here is an outline of how I would prepare for default.

Get New Money

Yes, the first step to a successful default, is securing new money for after the default. In the corporate world this would be DIP or Debtor in Possession financing. The difficulty with enforcing claims on a sovereign is key here. It is key because it is much easier for a country to walk away its debt than a corporation, but that also makes it trickier to get new debt once you have stopped paying existing debt. You are likely to need a “special type” of investor to provide post-default financing.

The IMF will be hurt by the default, but honestly, one of their primary mandates is to help countries in need. They lost control in Greece. They got caught up in the demands of the EU and actually didn’t implement a program like they normally would. If you look at how the IMF operates in other countries (past and present) and what they did in Greece, there are big differences. This happened because the EU interfered and had its own agenda, and the IMF bent to their will. So in spite of losses the IMF may take on existing loans, the IMF would likely work to fulfill their mandate. Lagarde also knows that it isn’t in anyone’s interest, in spite of post default anger, to let Greece come to a screeching halt. So, Greece should be working with the IMF to plan some emergency lending after default. Without a doubt it won’t be a pretty conversation, but it will likely yield results. So the minimal and most immediate financing should be supplied by the IMF even if it is done with a lot of kicking and screaming.

China could, and should play a key role. If there is any lender in the world (other than the Mafia) who knows that borrowers would be scared of defaulting to them, it is China. China probably doesn’t need to worry about “enforceability” of the contract, they would be a very intimidating entity to default to. Just think about the difference between negotiating with China or with the IIF – no contest. So china should be less afraid to lend than other borrowers, but they should actually want to get involved. Much has been made about potential asset sales by the Greeks. Various plans have been floated that relied heavily on Greece selling the assets to various EU entities. China has mentioned a desire to become involved in European bailouts, but at an asset owner level, rather than as just a lender. China wants to buy assets and wants strategic partners, it doesn’t just want to lend money. Also, going back to the US crisis, remember how reluctant we were to allow ports to go into foreign hands? In spite of US troubles at the time, they weren’t bad enough to relinquish any control of such “strategic” assets. Greece might be willing to sell minority stakes in things like ports that China would be smart enough to see as a once in a lifetime opportunity.

So look to asset sales, and partnership with China. Not only should you be able to secure financing, it would be at prices far better than selling these same assets to other European entities. The Chinese desire is strong, and the EU has felt entitled. Even more important, China has the capital to spend money to improve these facilities. China can actually spend money to make sure their investments work – which means JOBS for Greeks! A deep pocketed strategic partner (not lender) with long term goals would provide not only immediate liquidity but a potential engine for GROWTH!

While I was at it, I would probably lob in a call to Newport Beach where the largest fixed income fund in the world remains extremely underweight PIIGS debt. Maybe nothing happens, but maybe terms can be worked out where they believe they can perfect security interest in certain assets or get some other form of protection, that they are comfortable lending to a nearly debt-free Greece. Other fixed income and distressed debt investors should also be approached. Unlikely that they provide anything in the immediate aftermath, but it certainly plants the seeds for future lending. Remember, Greece will have virtually no debt, and have a strategic partner. It will always be difficult to perfect security interests in a sovereign, but over time some investors could latch onto the post default growth story. There might be a pleasant surprise, but if not, reaching out to potential future investors is worthwhile.

Then there is the ECB. This will be the hardest conversation, since the ECB has never made a mistake, is always right, and always will be right. So explaining why they are going to lose a lot of money and should provide new money will be ugly. The reality is, that the ECB should play a role in the post default Greece. They won’t want to. They will be angry. They will have been made to look like fools. Their puppet in charge will have failed them. There are lots of reasons for the ECB to refuse to play a role in the post default Greece, but they are all emotional, and none are logical. It all comes down to the banks. The Greek banks have been surviving on a scam where they issue debt to themselves and then get a Greek government guarantee, and then use that to get money for the Greek Central Bank or ECB. Those guarantees won’t be honored and the banks will fail, so the central banks have to figure out what to do. All these “TRANSFER” programs that have been in place will be in jeopardy. Someone will lose money for all these dumb loans. If it is the Greek Central Bank, they don’t have the money, so it will have effectively printed money?

The ECB, Central Banks, and other strategic partners, will need a plan for the banks. Equity holders need to be wiped out. Depositors must be protected. Sub debt should be wiped out. Senior unsecured debt should be defaulted on, and based on the status of each bank, settled out at a decent price. Then the banks need to raise new equity and new debt. If they can get real equity, debt should come. Greece may have to nationalize one or two of the banks (they don’t need to save more than a couple – how many banks does a country need to own?). There is probably a compelling investment case to be made post default for some of the Greek banks. The Turkish operations of NBG could be interesting. The ability to raise new debt for banks is better than for the sovereign. Nothing about the bank defaults will violate contract law. Creditors can enforce their rights, it just turns out that the best outcome will be to provide creditors with a higher recovery than they would get in a liquidation. But that is how a decent bankruptcy always plays out. Some new equity investors, decide that it is worth investing and giving old creditors a better price than they would have gotten through liquidation because it is too hard to put the pieces back together, and the time it takes, makes the business less worthwhile. The situation for banks will be very difficult to figure out with all the weird financing tools, but given their relatively small size, and motivated parties, it isn’t insurmountable – and remember, the losers here will be the equity and sub debt lenders, and to some extent bond investors, though their loss is unlikely to be 100%.

The Restructuring Carrot and the Default Stick

Immediately announce a plan to all investors. For every €100 of existing debt you can accept an offer to receive €10 of new 2.5% 10 year bonds, €10 of new 3.0% 20 year bonds, and €10 of new 3.5% 30 year bonds. Accrued interest will be “PIK’d” so it will also be paid out with the same ratio of new bonds. The bonds will have annual coupons, but the next coupon will be 12, 15, and 18 months from now respectively for the bonds in order to minimize our future payments and to ensure the payments are staggered so speculators don’t attempt to disrupt the markets ahead of a large coupon payment. For individual investors who hold less than €250,000 of Greek bonds that were bought prior to May 2010, the amount of new bonds will be tripled, so that only a 10% write-down of principal occurs for those individuals.

This will apply to all unsecured lenders. Including the ECB.

As of March 10th Greece will stop paying interest and principal on any non exchanged debt. Period. Full stop. Sue us.

All of the PSI talks seem to involve some money coming from the EFSF. That is none of our business. Banks are free to ask the EFSF for money if they think they deserve this, but this is a restructuring and it is between Greece and our lenders, no third parties.

I expect there will be lawsuits. But there is very little anyone can do to enforce payment. The bonds done under UK law have some cross default language and other “protections” but there is no stream of income or assets that are promised to the lenders. Away from those debtholders who may be able to use the right of “set-off” (where if you owed Greece money and they owe you money, you can net them), there is little way to collect. Greece will bear some expenses for fighting the lawsuits. Especially for the bonds under English law. On the other hand, imagine the windfall that Athens will get when armies of lawyers descend on the city to fight out a battle they have already lost. This will be much better than the expense account restricted visits from the Troika. These will be armies of high priced lawyers who only want and pay for the best. In the end they will lose, because the Greek courts will rule against them, no matter what, but it could provide a nice increase to the activity in Athens.

The key point is, that bondholders can rant and rave about the proposed deal, but they have few rights. There is no chapter 11 for Greece. You don’t have any rights.

The likely outcome is the holdouts fight for awhile. Then after 6 months or so of Greece not paying old debt there is a chance the holdouts will get tired of it, and will come back and ask if the offer to exchange still exists. Greece can let them exchange then because it is easier to do that then have potential lawsuits outstanding and because of the PIK nature, the investors who held out will get marginally worse treatment than those who participated originally and will have dealt with some legal costs on top of it.


Many of the austerity changes will still need to be implemented. The time horizon for implementation can be extended, but they need to be done in many cases. But Greeks can decide the priority. Greek citizens will still have to adapt and accept many unpopular changes, but after “screwing” the foreign bankers, they might be that much less reluctant, especially with any signs of growth appearing in the economy. So this doesn’t stop the need to change the way the Greek system works, but it changes the timing and who makes the decisions.

A virtually debt free Greece can focus on Growth and Re-Introducing the drachma

If this plan works, Greece will have cut their old debt by 70% (real principal reduction and not just NPV reduction). Greece will have had emergency lending from the IMF on good terms and developed a strategic partnership with China (or some other rich nation). Signs of growth will be appearing in the economy. The rest of Europe will be dealing with the problems the Greek default caused, but Greece can be trying to figure out a real future. Shipping? Industry? The opportunities are there, and Greece can start plans to go back to the drachma. It doesn’t have to be a massively devalued currency, because Greece will have the best debt to GDP in all of Europe.

Too optimistic of a plan?

Sure, maybe this is a best case. Some details are missing. Some problems have been overlooked. But someone, hopefully in Greece, needs to stand up to the technocrats and demand real plans! Real analysis of what default or no default look like. The problems are too big and too real for simple fear mongering to be enough to base decisions on.

Copyright © 2012 · Peter Tchir

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