Greek PSI

At the Dawn of the Biggest Debt Liability Management Exercise in History...

March 2012

Ioannis Sokos
Interest Rate Strategist


1. 2. 3. 4. 5. 6.

Greek Debt and the PSI Pool Participation and Valuation of the PSI 130bn Bailout Package & Greek Political Landscape Tendering and Voting Mechanics “New Bonds” – Legal Points Implications of the PSI on Greek CDS


1. Greek Debt Vs The PSI Pool


From July 21st to February 21st & Beyond… 7 Long Months… 2011. voluntary PSI targeting 95% participation. GGB Mar-12 was at 53%.65% in 2021 and 4. Face value haircut of 53. targeting a 120% Debt/GDP in 2020. 50%/50% split) 315 euros of new Greek Bonds issued by Greece These bonds will form a bundle of 20 different bullet bonds maturing from 2023 to 2042 with a step-up coupon structure (2% up to 2015. GGB Mar-12 was trading at 76% at that point. some degree of OSI (official sector involvement) via lower interest on EU bilateral loans and distribution of ECB & NCBs profits on SMP’s holdings of GGBs until 2020. 3% from 2016-2020.2% (ignoring GDP warrants which can add a maximum NPV contribution of 1. face value haircut increases to 53. PSI Timeline 315 euros of notional of GDP-linked securities (capped payoff of 1%. February 21st: Greek macroeconomic projections have deteriorated even further. GGB Mar12 was trading at 33%. NPV loss of around 75% for investors. EUR 130bn of additional financing to Greece. main benefit was the extension of maturities of the existing bonds (rescheduling). 4 available options were offered to investors with equal NPV loss of 21%.Bondholder Meetings Settlement Date for Foreign Law bonds Greek Elections ? 4 . 3.5% and estimated NPV haircut of 74.78% if they pay maximum amount each and every year) at a 12% discount rate. [We knew the target but we didn’t know the method] 2012. start paying from 2015 onwards) They will also receive any accrued interest on their existing GGBs holdings in the form of EFSF 6m T-bills.29 Mar Wed 11 Apr Sun 29 Apr PSI Public Offer German Parliament approved second Greek programme Finnish Parliament approved second Greek programme Eurogroup Meeting duscussing PSI progress EU Heads of States Meeting Revocation deadline for the PSI Expiration deadline for the PSI Results Announcement Settlement for Greek law bonds IMF Board Meeting to decide on contribution Redemption of the Mar 2012 GGB . [We knew the method but we didn’t know the target] 2011. October 26th: The July 21st deal was not adequate anymore since Greek macroeconomic projections have deteriorated further and Greek debt was on an unsustainable path. July 21st: First attempt for a restructuring of Greek bonds with NPV loss of 21%. agreement on 50% face value haircut.5%.3% thereafter. Fri 24 Feb Mon 27 Feb Wed 29 Feb Thu 01 Mar Fri 02 Mar Wed 07 Mar Thu 08 Mar Fri 09 Mar Mon 12 Mar Tue 13 Mar Tue 20 Mar 27 .Held by ECB Foreign Law Bonds . and special features like the Co-Financing Agreement. The Exchange Offer PSI: For every 1000 euros face value of existing GGBs investors will get: 150 euros of EFSF 1y & 2y bonds (PSI Payment Notes.

Feb 2012 1/1/2015 .pdf 5 . The New GGBs will be only 18% of Greek debt in 2015. EU/IMF tranches are the most “senior” ones across all Greek debt. 50 0 15 0 18 6 18 GGBs ECB's GGBs EU/IMF EFSF Loans T-Bills Other Loans (1) http://www.9% EUR 19bn of Other Loans TOTAL: EUR 368bn of debt. and ECB’s holdings. 4.9% 19. Any potential holdout bonds will be the most “junior”.Greek Debt Profile – Basic Components: Official Vs Private Holdings Greek Debt Composition (1) Greek Debt Composition 4. This means that it will be impossible to have a second restructuring without substantial official sector involvement.1% 15.5 27. or 169% of GDP in the end of 2011 Greek Bonds (ex-SMP) T-Bills Other Loans SMP's GGBs EU/IMF Loans Cumulative: Tranches: Greek Debt Before & After PSI 250 206 EU/IMF Aid Disbursements Profile 20 29 38 53 65 73 78 88 94 100 102 108 110 20 9 9 15 12 8 5 10 6 6 2 6 2 May-10 Sep-10 Dec-10 Mar-11 Jun-11 Dec-11 Feb-12 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 EUR 37bn Remaining From 56%of the debt ahead of PSI to 18% of the debt in 2015 167 Before PSI .gr/content-api/f/binaryChannel/minfin/datastore/11/e9/47/11e94797847da1484fb1e58e1b7d2bfa295ef500/application/pdf/Bulletin_No64.1 64 Debt in private sector hands will be replaced by debt in official sector hands.End of Programme 200 150 100 73 62 56.8% EUR 237bn of GGBs (BBG: GGB Govt) EUR 18bn of International GGBs (BBG: Greece Govt) EUR 4bn of Hellenic Railways Bonds (BBG: HELNRR Govt) EUR 16bn of T-bills (BBG: GTB Govt) EUR 73bn of EU/IMF loans disbursed from the EUR 110bn bailout package.3% 55. EFSF loans.minfin. including EU/IMF.

Greece is in a rush to complete at least the Greek Law bonds exchange (including the March 2012) and then it can deal separately with the foreign law bonds holdouts.31 86.97 1. part of IIF committee) that have shown their commitment of participating in the PSI. Over the last few days.8% Yes No No CHF Bond 0. and this change of hands in the last hours ahead of the PSI could cost in terms of participation. there has been some trading activity on foreign law bonds.0% The Greek Law “eligible titles” is the only one of the 5 categories that includes aggregate CACs. there will be also blocking states on some foreign law bonds which will create hold-out investors.3% Because of the aggregate CACs in the Greek Law “Eligible Titles” and the requirements of a 50% quorum and 2/3 majority voting.58 100. With respect to the remaining 14%. 86. However.89 3. Exchange designated securities (guaranteed and physical securities) require no consent solicitation while in the CHF bond there is no exchange invitation. thus leading to a 86.1bn or 28.4% Yes Yes No Exchange Designated Securities 7. European banks.3% No Yes No TOTAL PSI POOL: 205.2% minimum participation for the whole PSI.75% participation Greece could actually amend the terms of 87% of the overall outstanding amount. This means that with a 28.8% 0.87 8.75% of the total PSI pool. Whether participants will be enough to reach the 90% threshold is uncertain at this point.54 0. the minimum possible participation in Greek Law bonds that could activate the CACs is 59. There will definitely be some blocking positions and it is difficult to assess the potential participation from this pool of bonds. Collective Action Clauses on foreign law bonds apply on a bond by bond basis.4% 3.2% Yes Yes Yes Foreign Law Gov Bonds 16. there are holders of foreign law bonds (Greek banks.2% Greek Law "Eligible Titles" Foreign Law Guaranteed CHF Bond Foreign Law Gov Bonds Exchange Designated Securities Bonds Category Outstanding Amount % of Total Exchange Offer Consent Solicitation Aggregate CACs Greek Law "Eligible Titles" 177.2% Yes Yes No Foreign Law Guaranteed 2. Our view is that the Greek CACs will be activated.The 5 Pools of Bonds of the Greek PSI Greek PSI Pool of Bonds 8. 6 .2% 1.

923. 11/01/2014 1.958.162.3 6 4 2.856.3 0. 5.OSI: Treatment of ECB’s & NCB’s GGBs Holdings ECB’s & NCBs’ GGBs Holdings B illions 12 10 11.000 04/04/2017 48.000 20/07/2018 1.000 20/04/2017 1.698.982.000 18/05/2012 3.865.000 20/02/2013 443.000.627 03/07/2013 84.000.7bn to repay the ECB at PAR for the Mar-2012 bond redemption.004.1 0.800 20/03/2026 936.380.000 20/05/2013 4. ISDA DC decided on 1st of March that it does not.706.1 0.307.669.000 20/07/2016 2.000 20/08/2014 3.541.800. given that one of the four basic terms for eligibility in Greek law CACs is that the bonds must have been issued no later than 31/12/2011.300.8 5.550. Then according to the OSI guidelines.000 22/10/2019 2.3 1.853.820.9 0.000 20/08/2015 3.1 ECB’s SMP holdings along with NCBs’ GGBs holdings received special treatment so that they can escape the consequences from the activation of CACs on Greek law bonds.154.588.000 19/07/2019 3.67bn of March 20th 2012 bonds that ECB is holding.877.000 01/07/2014 30.687 20 1 20 2 1 20 3 1 20 4 1 20 5 1 20 6 1 20 7 1 20 8 1 20 9 2 20 0 2 20 1 2 20 2 2 20 3 2 20 4 2 20 5 2 20 6 2 20 7 2 20 8 2 20 9 3 20 0 3 20 1 3 20 2 3 20 3 3 20 4 3 20 5 3 20 6 37 7 .800. Therefore the EFSF/IMF facility will need to disburse CASH to Greece by March 20th the latest.305.3 2 - 1.750.491.349. they are not eligible for CACs.913 20/05/2014 4.000 20/03/2024 1.9 1.306.000 25/07/2025 80. Thus. Still lacking details on the specific profit distribution mechanism. BUT with different ISINs and different issuance date since all of these bonds were created on Feb 20th 2012.3 8 6.000 Total 56.353.000 20/05/2013 1. ECB's & NCB's Holdings 20/03/2012 4.380.000 20/08/2012 3.000 22/10/2022 1. They exchanged their holdings with new Greek bonds.278. Greece will have to repay at PAR EUR 4.0 8.752.300.4 1.1 10. ECB via NCBs may re-distribute the profit (PAR-purchase price) to Greece for debt sustainability purposes.366.870.512.000 25/07/2030 94. identical in all payment and maturity terms.170.593.895.000 20/07/2015 3.350.296.000 20/08/2013 2. The difference of PAR – Purchase price and the coupon will be re-distributed by ECB to NCBs in order to be used for the Greek programme.350 20/09/2037 132.133.450.299.387.334. Following question on ISDA website whether ECB’s bond swap constitutes a credit event.7 Greece still needs to find EUR 4.997 19/06/2020 1.000 20/07/2017 3.

Participation & Valuation of PSI 8 .2.

2bn of Greek law bonds. there is a 5% gap with the assumed participation of 95% in the IMF DSA.8bn (28% of total non-Greek law) participation (tendered in the invitation or after proposed amendments are put in place).7% of the total PSI pool. 9 . Still. the republic WILL NOT PROCEED with any part of the transactions. even if you manage to get a 90% participation after the proposed amendments have been put in place. a minimum of EUR 59. the republic.27bn Greek bonds you need another EUR 7. If Greece chooses to pay those bonds at PAR at their maturity. P < 75% : If less than 75% has been validly tendered for exchange and the republic has not obtained consents in the consent solicitation representing at least 75% of the aggregate principal amount. the EUR 130bn might not be enough to finance the country’s funding needs until the end of the programme period. We believe that the 95% participation is the strictest threshold of all given IMF’s insistence for no more than 120% debt/GDP in 2020. reaching a 86.1bn or 28. reserves the right to waive the minimum participation condition and proceed to exchange designated securities tendered pursuant to the invitation (still no reference to CACs). However this is not enough in order to reach the above 90% overall participation. From the remaining EUR 28. in consultation with its official sector creditors. To activate the CACs on Greek law bonds you need a 50% quorum and 2/3 majority. 75% < P < 90% : The republic. i.Minimum Participation Conditions (1/2) P > 90% (Minimum Participation Condition): The republic WILL COMPLETE the exchange of validly tendered designated securities if more than 90% has been tendered for exchange pursuant to the invitation and the parallel invitations by the expiration deadline (no reference to CACs at this point). CACs Activation: IF the republic has received tenders of designated securities and has obtained consents to modify designated securities in the invitation THAT upon acceptance would result in at least 90% of the aggregate principal amount outstanding of the overall debt becoming either EXCHANGED upon acceptance by the republic or SUBJECT TO the proposed amendments. This can be enough to put into place the proposed amendments to the remaining EUR 118.2% participation. This means that there are no provisions in the programme for this extra 5% of holdouts. as applicable. in consultation with its official sector creditors. INTENDS to put into effect the proposed amendments to all the eligible titles.e.

Minimum Participation Conditions (2/2) The Republic may. The Republic shall have complete discretion in determining whether to terminate the invitation for any series of designated securities and any such termination will have no consequence with respect to the invitation for all other series of designated securities. Greece Can Change Everything In the PSI Invitation In its Own Discretion 10 . waiver. re-opening. amendment. in its sole discretion. re-open. amend. waive any condition of or terminate the invitation or modify any settlement date at any time (subject to applicable law and as provided in this invitation memorandum) with respect to one or more series of designated securities. termination or modification will be announced as provided in this invitation memorandum as soon as reasonably practicable after the relevant decision is made. Details of any such extension. designated securities of that series in respect of which participation instructions have been submitted will be released from any blocking and will no longer be subject to the invitation. If the Republic terminates the invitation with respect to any series of designated securities. extend.

2 31.9 5. once the projected cash flows are known.8 8. solely depends on the selection of a discount rate.Valuation of the PSI Estimating the NPV of the PSI Deal 50 45 40 35 30 NPV 25 20 15 10 5 0 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Greek Discounting Rate (flat) 21.4 21.4 12.0 36.9 20.9 23.8% under 18% discount rate and are likely to be the cheapest to deliver in an upcoming CDS auction.1 7.8 3 9.4 5 4 10.0 13.8 6 24. The PSI deal has an NPV of 25. The repayment profile of the bundle of 20 new Greek bonds is equivalent to an amortizing 30y bond.8 21.0 Cash Flows Relating to New Greek Bonds Total NPV for Investors EFSF 2y Notes NPV of new PSI Bonds 10 9 8 7 Amortizing Notional Coupon Payments 25.3 5.0 28.4 2 1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Estimating the NPV of the New Greek Bonds € 50 NPV Estimates of New Greek Bonds for Various Discount Rates € 45 € 40 € 35 € 30 € 25 € 20 € 15 € 10 €5 €0 12% 18% 15% 20% NPV estimation.9 15.3 20.1 22.8 6.9 30.4% under 15% discount rate and 16.8 23. 11 20 23 20 24 20 25 20 26 20 27 20 28 20 29 20 30 20 31 20 32 20 33 20 34 20 35 20 36 20 37 20 38 20 39 20 40 20 41 20 42 .9 34.9 8.4 6.8% at a 12% discount rate which becomes 30% under a 9% discount rate (ignoring GDP-linked securities). The 30y new Greek bonds reach NPV of 21.2 16.9 19.4 27.

The average price of Greek law GGBs is 21. there are GGBs in the long-end of the curve which trade below the expected NPV of the PSI deal. and this can be considered as a floor for post-PSI trading of the new Greek bonds. Implementation risks may form part of this price discount.40 which corresponds to a discount rate of 17-18%. 12 . Even for a discount rate of 15%.Greek Law Bonds – In Search for Value… Greek Law Bonds Prices Vs PSI NPV Estimates 40 Greek Law Bonds with Outstanding > EUR 1bn Last Closing Price (BBG) r = 15% r = 12% r=9% 35 30 25 20 15 20 /0 3 18 /20 /0 12 5 20 /20 /0 12 8 22 /20 /1 12 2 20 /20 /0 12 2 19 /20 /0 13 4 20 /20 /0 13 5 20 /20 /0 13 5 20 /20 /0 13 8 22 /20 /1 13 2 11 /20 /0 13 1 20 /20 /0 14 5 21 /20 /0 14 5 10 /20 /0 14 8 20 /20 /0 14 8 04 /20 /0 14 2 20 /20 /0 15 7 20 /20 /0 15 8 20 /20 /0 15 7 04 /20 /0 16 4 20 /20 /0 17 4 20 /20 /0 17 7 20 /20 /0 17 7 19 /20 /0 18 7 22 /20 /1 19 0 19 /20 /0 19 6 22 /20 /1 20 0 20 /20 /0 22 3 25 /20 /0 24 7 20 /20 /0 25 3 25 /20 /0 26 7 20 /20 /0 30 9 20 /20 /0 37 9/ 20 40 The outlier GGB Apr-13 is not PSI eligible and this is why it is trading at a premium. It’s hard to believe Greece could trade tighter than Portugal (but Portugal could rally at some point). 5y-10y Portuguese bonds trade at around 15% at the moment.

Greek Foreign Law Bonds – In Search for Value… Greek Foreign Law Bonds Prices Vs PSI NPV Estimates 95 85 75 65 55 45 35 25 15 15 /0 5/ 20 12 25 /0 6/ 20 13 05 /0 7/ 20 13 14 /0 7/ 20 15 01 /0 2/ 20 16 08 /0 4/ 20 16 11 /0 4/ 20 16 22 /0 8/ 20 16 05 /0 7/ 20 18 11 /0 3/ 20 19 13 /0 7/ 20 20 07 /0 7/ 20 24 06 /0 7/ 20 25 14 /0 4/ 20 28 10 /0 5/ 20 34 17 /0 7/ 20 34 The May 15th 2012 bond is currently trading at around 80 as the market believes that this bond will be paid at PAR.75. Given that. The average price of all foreign law bonds (for which BBG has a price) is 34. which corresponds to a discount rate of 6-7%. This is of course distorted by the very expensive May-2012 bond which is expected by the market to be paid at PAR. Out view is that there is a lot of uncertainty on whether holdout international bonds will be paid at PAR. We don’t think it is right to assess the potential exit yield from the International Law bonds because not all of them are going to participate in the PSI (hold-outs) and thus they are not a fair proxy of the potential PSI package value. but are above the Greek law bonds. 13 International Law Greek Bonds for which we get a BBG Price Last Closing Price (BBG) r = 15% r = 12% r=9% . The holdout strategy is a very risky one given the narrow limits of available funding for Greece’ funding needs until the end of the programme. we think that the 2012/13 international bonds are trading expensive given the risks. Prices fall from 2013 onwards due to the embedded Greek post-PSI default risk.

EUR 130bn Bailout Package & Greek Political Landscape 14 .3.

assuming that most holdouts will be in the shortend of the curve. This programme is supposed to fully finance Greece at least until the end of 2014.0 29. by analysing funding needs and sources up to the end of 2014.0 23. In the table below we explain how the EUR 130bn package will be spent.0 130. thus implying even less room to pay holdouts at PAR. Also.0 5.3 9.5 172. an undershoot in Privatisations or overshoot in Deficit is very likely. In 2015 Greece will have to either get a 3rd programme (conditional on hitting all performance targets) or borrow from the markets (very low probability) or default on its debt obligations and do a second restructuring. 15 .4 8.0 176.5 10.5 50.0 6. beyond the 5% assumption in the IMF’s DSA.2 Funding Sources Privatisations Original 110bn aid 2nd Bailout Programme Total Funding Sources 12. This provision is included in the funding needs already.0 This proves why Greece has no room at all to pay holdouts at PAR.0 34. Up to Funding Needs PSI Sweeteners EFSF Bonds Accrued Interest EFSF Bills Bank Recapitalisation Deficit GGBs Redemptions EU/IMF Repayment 5% PSI Holdouts T-bills Reduction Others Total Funding Needs end of 2014 30. Whether or not Greece will receive a 3rd programme will depend on the implementation of the second one and on the Global Economic conditions prevailing at that time.Package of EUR 130bn – Funding Needs & Sources Greece will receive a 2nd bailout package of EUR 130bn on top of the EUR 37bn (becomes EUR 34bn after step-out EU members) remainder of the 1st EU/IMF programme.

ND has followed a hard opposition line. conduct the PSI and lead the country into elections. Papademos who became PM. The call of a referendum in November 2011 by PASOK’ Papandreou proved to be the move that marked the end of PASOK’s independent government. They support more spending cuts and less tax increases in order to boost the economy. Since November. PASOK. The three parties together had 253 seats. They believe in renegotiating the terms of the MOU with Troika. The austerity measures have led many PASOK MPs to express their disagreement and leave the party. one more than ND’s MPs which is the leading party in the polls. Only 199 MPs voted yes in the 2nd bailout programme. ND & Laos formed a coalition government under Mr. Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 16 Pasok Laos ND Syriza KKE Independent Recent Polls – PASOK is below ND since Aug 2011 60 50 40 30 20 10 0 Sep-09 PASOK KKE SYRIZA ND LAOS . They approved the latest austerity measures but with significant political casualties.Greek Political Situation (1/2) Parliamentary Seats (300) 63 9 131 Main Parties & Leaders Party Pasok ND KKE Laos Syriza Ideology Centre-Left Centre-Right Communist Right-Wing Left-Wing Leaders Papandreou Samaras Papariga Karatzaferis Tsipras 14 21 62 PASOK won the 2009 elections and obtained one of the strongest majorities in recent Greek political history of 160 seats. opposing the MTFS and the IMF memorandum. leading to 63 independent MPs in the parliament. PASOK and ND lost 22 MPs each and look much weaker in the parliament now. The sole purpose of the temporary coalition government is to approve the 2nd bailout programme. Laos left the coalition party on Sunday Feb 19th as it did not vote for the new round of austerity measures. Laos lost 2 MPs who voted yes. PASOK’s majority has weakened substantially in line with its popularity in recent polls.

Samara’s turn in the last critical vote did cost him in the polls as he had to dismiss 22 MPs from the ND party. In any case. This is uncharted territory for Greeks themselves as the two biggest political parties of PASOK and ND have governed Greece since the return of democracy in 1974. squeezing the available seats for the two biggest parties. A potential coalition with ND can’t be ruled out as these are the two main parties that embrace Greece as a part of the Eurozone. This time looks much different though. Two left parties follow with very high shares in the polls. always obtaining very high shares in polls and elections.7% prefer a politicians’ only government.1%. This demonstrates the disapproval of the whole political system in Greece by the Greek people. sharing the European vision of Greece is an important enough reason to lead these two parties to form a coalition government. PASOK comes third with 11% share. the communist KKE with 10. Three smaller parties might be able to surpass the 3% limit and join the parliament. any request for a written pledge by all political parties in Greece on the their commitment to the implementation of then new programme will be impossible to get as except for PASOK and ND most of the remaining parties use the anti-IMF line as their flagship to their electorates. The most likely elections’ date is the April 29th at the moment but this could change depending on the pressures from EU. However.3% share. Papademos coalition government or a technocrats’ government a la Monti will rise in the coming weeks. elections could work as a “relief valve” for the Greek society which is angry with the gap between the views expressed in the parliament and those in the streets. A coalition government will be the only available option while there is a mixture of left and right parties ready to enter the parliament with more seats than they ever had. at such critical times. The second party in the polls appears to be the Democratic Lefts with 12. 68. In any case. This share could increase in elections time. a new political party formed in 2010 that takes advantage of the PASOK’s weakness and disapproval from the traditional centre-left voters. If this is not possible. it is of ultimate importance that the two biggest parties of PASOK and ND can form a coalition government together even though this is not the standard practice in Greek politics. it would be much more difficult to find an alternative ally for ND or a 3rd ally for the ND/PASOK alliance. Three opinion polls that took place over the weekend of 18-19/2 came on time to validate this point. Pressure from EU for a continuation of Mr. In the aforementioned polls.8% prefer a balanced government between technocrats and politicians while 34% prefer a technocrats’ only government and only 7. However.Greek Political Situation (2/2) One of the reasons explaining the harsh stance of EU leaders on Greece and the insistence for increased conditionality and surveillance is the rapidly changing political environment in Greece. In one of the polls that were published on Feb 19th. The right-wing LAOS (ex-member of the coalition government) follows with 5. We present the average outcome of these three polls according to which ND comes first with a 22.6% and Syriza (coalition of the radical left) with 9%.3% of the sample said that a coalition government would be more suitable to tackle Greece’s problems at the current juncture. once the new leader of the party is elected in the coming weeks. much lower than the above 30% share that it had ahead of the “yes” vote to the latest round of austerity measures. Clearly the damage from the past two and a half years of governance is irreversible. 17 .3%. 55.

there was a lot of uncertainty in the market. in a scenario in which Greece misses its targets. Social unrest. Secondly.e. First of all. In the past. overall a nice volatility-smoothening tool for the coming months. it might fell under less pressure to achieve such a surplus. aggressive wage cuts and the non-payment of pensions are also potential reasons for contagion. every time there was a review of the Greek programme. for example. Don't forget that the PSI is a prerequisite to the second bailout programme. and if this is not achieved because of the deepening recession. it needs the EU/IMF tranches to repay it. It doesn't mean either that the EU will pay the 20 March redemption if talks on the PSI fail. 2) Interest-rate expenses: Greece's huge debt stock led to around EUR 15bn of debt-servicing costs in 2011. 4) Other: These include settlement of arrears. so it needs to borrow to cover the gap. even if Greece defaults. it should happen by 2013. This proposed plan does not mean the EU will guarantee Greece's debt and repay it for ever. as it could no longer use the threat of default every quarter to put pressure on EU members to disburse the funds. it won’t be able to pay pensions and wages. So.Escrow Account for Bailout Money – Debt servicing senior to primary deficit German Chancellor Angela Merkel and French President Nicolas Sarkozy proposed a separate escrow account for the bailout funds that will be disbursed to Greece. 1) Primary deficit: Greece's revenues are still less than its expenditures. debt repayments would effectively become somehow “senior” to primary deficit funding. we saw EUR 28bn of GGBs expiring. That would be very significant because it breaks the link between debt repayment and the quarterly reviews to which Greece has been subjected for the last 18 months. and what Chancellor Merkel and President Sarkozy discussed is only related to the disbursement format of this second bailout programme. one to fund debt repayments and one to fund the primary deficit. such a plan would have some significant limitations. The part spent on debt repayment would be kept in a special escrow account from which investors would be paid directly. massive unemployment. because if Greece missed the targets. but far from a guarantee for Greek bondholders. What does this mean? First of all let's explain how Greece spends the tranches it receives from the EU/IMF bailout package. More than that. What does this mean? That Greece will have to use its primary surplus to partly repay its debt obligations. 3) Redemptions: In 2011. the recognition of implicit or contingent liabilities and other special items. This of course will not be a sustainable situation. especially around the time of the quarterly reviews. This would no longer be the case. for a few months. an escrow account would also reduce Greece's bargaining power. What Chancellor Merkel and President Sarkozy implied was that each disbursement to Greece should be split into two parts. it might not receive the next tranche of its bailout fund and might default on its debt. This includes both the coupon payments on GGBs and the interest paid on the EUR 73bn of EU/IMF bailout funds already disbursed. if it is known that debt obligations will be repaid by the EU. assuming that there is one. So. It becomes clear that the interest on the bailout funds will exceed the coupons on the new PSI bonds. 18 . Overall. Creating less volatility and less tension in the system is certainly a desirable outcome. but also defaulted economies. which will have a total maximum outstanding of only EUR 70bn. Greece is expected to return to a primary surplus in 2012. this plan could absorb some of the volatility and tension and reduce contagion to other countries. However. Contagion does not only come from the bond market. even through it had not hit its fiscal performance targets. as the “default” would be replaced by "internal default". As Greece can't refinance its debt. then it is akin to a defaulted country that keeps creating debt without being able to use the proceeds in the way it wants. i. However. especially in an election year. deposits into the HFSF. This had important implications for other peripheral markets due to so-called contagion effects. but only in the short term.

4. Tendering and Voting Mechanisms 19 .

00pm (CET) 8 Mar 2012 Tendering also means voting ‘yes’ (if consent solicitation applies) Expected settlement date 12 Mar 2012 Exchange and timetable at discretion of Greece Consent solicitation process Mechanism to amend terms of bonds to bind holdouts into exchange Requires voting threshold to be met to be effective Foreign law bonds on different timeline and handled on bond-by-bond basis 20 .Tendering and voting mechanics 3 invitation memoranda for non-US persons “Designated Securities” (exchange offer and consent solicitation) “Exchange Designated Securities” (exchange offer only) Swiss bond (consent solicitation only) Exchange process Exchange of existing bonds for PSI consideration Exchange period open. due to end 9.

Tendering and voting mechanics Decision on whether and how to tender and/or vote is complex and should be made with legal and other professional advice Invitation memoranda sets out process for tendering/voting: Process depends on bond and personal circumstances of holding Holders through intermediaries likely to need chain of instructions Submitting instruction means making representations/undertakings Limited ability to revoke instructions Results in blocking of bonds in clearing system Paper process for securities not in clearing system References to securities held as Eurosystem collateral with central bank Ability to attend physical meetings on 27-29 Mar 2012 for foreign law bonds Contrast with PSI 1: No requirement to aggregate holdings at group level Possible to take different actions with respect to different bonds 21 .

“New Bonds” – Legal Points 22 .5.

“New Bonds” – legal points Entitlement to €315 of New Bonds per €1. not all EFSF indebtedness 23 .000 of existing debt exchanged Terms still being reviewed by the market English law Trustee structure Benefit of Co-Financing Agreement Links payments under New Bonds with payments under €30bn EFSF facility Common agent distributes payments on pro rata “Turnover” provisions if the EFSF or bondholders recover more than its/their share Extends to €30bn EFSF facility only.

“New Bonds” – legal points Pari passu with “all unsecured and unsubordinated borrowed money obligations” Negative pledge but note “Relevant Indebtedness” nuance Events of Default include: Failure to pay interest (30 day grace period) Cross-default / cross-acceleration Relevant Indebtedness only $250m threshold EFSF €30bn facility agreement acceleration Sovereign debtor triggers Acceleration requires instruction by holders of 25% of principal outstanding of all New Bonds. although instruction can be rescinded by holders of 50% Waiver of sovereign immunity (but note limitations) 24 .

“New Bonds” – legal points Collective action clauses (all New Bonds treated as single series) Reserved matters Quorum: 66 2/3% of principal outstanding Vote: 75% of principal represented at meeting Non-reserved matters Quorum: 50% of principal outstanding Vote: 50% of principal represented at meeting Aggregate collective action clause for ‘cross-series’ matters also affecting other debt Affirmative vote of 75% of principal represented at series meetings Affirmative vote of 66 2/3% of principal represented at each series meeting Ability for vote to fail overall but apply to some of the relevant series Different requirements for written resolutions and adjourned meetings Provisions to exclude bonds held or controlled by Greece 25 .

6. Implications of the PSI on Greek CDS 26 .

Greece CDS – a snapshot of the market Reference Entity: Hellenic Republic Western European Sovereign transaction type Credit Events Failure to Pay Restructuring Repudiation/Moratorium DTCC data* Over 4.9bn of trades outstanding (gross basis) $3.2bn of trades outstanding (net basis) – small compared to outstanding debt Trading on ‘upfront’ basis due to market expectation of Credit Event Currently over 70 points upfront * DTCC data derived from website 26/2/12 27 .900 trades outstanding $69.

26/2/12 28 .Greece CDS – a snapshot of the market Greece USD 5-year CDS Source: Bloomberg SOVR<GO.

it is expected that a CDS auction would be held due to the “300/5” rule 29 .Greece CDS . so the PSI need not have 100% participation or effect across all bonds If there is a Credit Event. market standard CDS would not automatically trigger (as optional) but it is generally expected that one of the parties will trigger Only need one bond issuance to be mandatory exchanged.implications of the PSI PSI proposals could result in: Exchanges on voluntary basis only or Exchanges on mandatory basis through CACs (as well as voluntary) or No exchanges or binding amendments A voluntary exchange would not be a Restructuring Credit Event but a mandatory exchange (through the use of CACs) might be a Restructuring Credit Event If a Restructuring Credit Event occurs.

potential auction considerations If there is a Credit Event and an auction is held. the auction process would be “unbucketed”. i. not divided into different maturity buckets All relevant decisions made by the ISDA EMEA DC Timing of auction would be key to determining available deliverable obligations Deliverable obligations may include the following if (i) in existence and (ii) deliverable: Any new bonds issued by Greece as part of the PSI Any existing bonds issued or guaranteed by Greece that remain outstanding Other debt? EFSF bonds and GDP-linked bonds not considered deliverable Auction price typically driven by “cheapest-to-deliver” dynamics and current pricing implies low recovery 30 .Greece CDS .e.

if the PSI switches all or substantially all the Greek law debt into English law debt.Greece CDS – the longer view If there is no Credit Event as part of the current PSI process: still possible that a Credit Event may occur in the future as events unfold the market could continue to trade at distressed levels if uncertainty persists although there could some significant volatility in the short-term if the market rethinks possible scenarios If there is a Credit Event as a result of the current PSI process: substantially all existing CDS expected to be settled new trading activity thereafter could be low if pricing remains at elevated levels due to continued uncertainty Irrespective of whether there is a Credit Event. the ability of Greece to restructure its debt in the future will be severely limited 31 .

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