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Thursday, November 29, 2012 4:16 PM

New Meaning of the Word Voluntary; Bond Buyback Balancing Act

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It is a deep stretch of the imagination to twist arms and appeal to "patriotic duty" in an effort to coerce someone to do something they really do not want to, then call the action "voluntary".

It is yet another thing to claim something is voluntary yet tell them it is "required". The latter has happened (again), when it comes to Greek debt.

The Financial Times reports Athens banks told of debt buyback ‘duty’

Yiannis Stournaras made clear the country’s four largest banks, which together hold about €17bn of government bonds, would be required to sell their entire holdings even though the buyback is billed as “voluntary”.

It was the “patriotic duty” of Greek bankers to ensure the success of the buyback, due to be launched next week by the country’s debt management agency with up to €14bn of additional European funding, Mr Stournaras said on Wednesday.

Yet Athens bankers appeared reluctant to be forced into a sale that would weaken their balance sheets and discourage local investors from participating in rights issues expected early next year as part of a €24bn recapitalisation of the sector.

“The banks stand to lose some €4bn by having to sell their bonds at around 33 cents on the euro,” said one Athens banker.

About half the €62bn of bonds issued in a partial restructuring of Greek debt last February are held Greek banks, pension funds, state entities and individual investors.

The debt management agency is set to announce details next week of the buyback scheme, which would be completed by December 12, the day before eurozone finance ministers are due to give the green light for disbursing the Greek aid payment.
"Voluntarily Forced"

Whereas Greek banks may be "voluntarily forced" (as if such a ludicrous idea even exists) into steep losses, anyone else holding such debt sure will not be.

Once again this whole notion of "voluntary" rests on arbitrary decisions as to what will trigger credit default swaps.

In that regard, please recall that in October 2011, the labeling of labeling 50% haircuts on Greek debt as "voluntary" proved many “Standard” Credit Default Swaps on Greece Are a Sham.

Thus, nothing really "new" is happening here. "Voluntary" means whatever the biggest players want it to mean (always to their advantage of course).

Bond Buyback Balancing Act

Bloomberg discusses this setup in Greek Bond Buyback Hostage to Below-Market Prices.
Greek efforts to ease indebtedness by repurchasing its own bonds at less than their face value depend on investors accepting below-market prices rather than holding out for an improved offer.

Balancing Act

The new bonds have collective action clauses, which in a second restructuring would allow a preset majority -- typically at least 66 percent -- to force holdouts to take part, according to Gabriel Sterne, an economist at Exotix Ltd. in London. Still, enforcing the CACs risks triggering credit-default swaps and being put into default by the ratings firms to deal with a rump of bondholders, he said.

“Would it be worth the fight with the hedge funds?” he said. “I just don’t think they would want to go there yet again.”

“If the buyback price is forced up too high, it will be unpalatable to Greece and the European authorities, and the buyback will fail,” Sterne said. “The incentive not to participate is likely to be strong. The average value of the bonds for those that do not participate could rise sharply if there is very high participation.”

Sterne, a former IMF official, estimates that the strip might go as high as 50 cents on the euro assuming there is broad participation, compared with 24 cents if the buyback fails.

Bondholders probably will call the finance ministers’ bluff, said Peter Tchir, the founder of New York-based TF Market Advisors.

“Now that the Eurogroup has made a condition out of the bond repurchase, it is almost the obligation of the bondholders to hold their feet to the fire,” he said. “I can’t see bondholders accepting last week’s prices without trying for more.”
CACs and the Balancing Act

Got that? No one wants to trigger Collective-Action-Clauses thereby "forcing participation" because it would trigger CDS contracts. Yet participation must be high enough so the Troika can pretend the results help Greece.

Given the incentive to not participate in the offer is huge,  Greek banks were told their participation in the voluntary offer was required.

Thus, we see these preposterous games yet again as to what is "voluntary" and what isn't. Moreover, forcing Greek banks to take more losses means they will again need to raise capital (a perpetual state of affairs for Greek banks).

Of course any sensible person realizes none of this will actually help Greece. Instead, it will enable huge pretending games go on a bit longer, perhaps long enough to get German Chancellor Merkel reelected, which seems to be the real issue in play, not the well-being of Greece.

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Mike "Mish" Shedlock

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