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We wanted Prometheus, instead we have Epimetheus

Thursday March 8th 2012

Thursday, March 8th 2012
"We wanted Prometheus, instead we have Epimetheus"  
How Greece and the investment community could have benefited from visionary thinking and proactive gestures, instead of the reactive, restrictive  rear view policy now in place.
The offer to exchange and amend ones Greek bonds is a rather complicated offer and as this note is typed there are just under 360 minutes until the deadline for the Greek PSI deal to be be accepted. Acceptance has to be signalled by 21:00 CET, 20:00 GMT, 15:00 Eastern.
Really, any investor, institution or individual that has managed to become entangled in this financial complexity has little choice other than to accept the PSI deal. They will lose a total of 73% of the their NPV, as old Greek debt is rolled over into 30 year new Greek debt. Such a new asset will not be an asset at all...it will be a liability. It will prove to be illiquid, have to trade by appointment and any theoretical value will be just that...a  theory...a Greek myth. Something to tuck away in the darkest corner of the portfolio until 2042.
That brings the total that has been placed into the agreement at approximately EUR124Bn, roughly equivalent to $163Bn.  Greece would naturally prefer to see a "voluntary" deal...of course the word voluntary is in this context open to a wide degree of interpretation.
Given the level of acceptance so far one has to conclude that the CAC hurdle rate will be passed with little problem.
Murky interpretation...
This bond exchange process will proceed if there is 90% participation, so if the total holdings of voluntary participation is EUR185.04Bn. Given this scenario the Greeks may or may not activate the CAC’s. We say this as there would be just EUR20.6Bn worth of bonds not committed. many of the withheld bonds would be issued under non Greek or "foreign" law bonds.
The middle ground situation is if the participation is pitched somewhere from 75% to 90%. In this situation the Greek government can press ahead to proceed with the offer, although there will be plenty of conversations between Athens, Brussels, Berlin and Frankfurt. Clearly Athens has lost control of its financial destiny.
Should the level of participation prove to be under 75% and the consent toward the CAC’s is less than 75% of the total debt then Greece would most likely not continue with the PSI agreement.
Whatever happens this evening...one can be sure that the future of Greece staying inside the Euro will boil down to compliance with the earlier German proposal.
Greece must commit itself to giving absolute priority to future debt service and  be willing to accept and allow a relocation of its national fiscal sovereignty to the European level.
Should we hear any muttering that the Greek government...now or post an April election is backsliding on this point one can only assume...in fact we should demand that the Troika close the books and withhold future bailout transfers so leading Greece to fail to pay its bills and default. In essence, Geece would be forced to exit the Euro Zone.
Buckle up...this is going be a bumpy ride.

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