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'Default' rating hits PSI tender

by Dimitris Yannopoulos 28 Feb 2012

The Standard and Poors building in New York (Reuters) Despite government reassurances to the contrary, Standard & Poor’s downgrade of Greece to selective default (SD) and its bonds to default (D) late on Monday was a setback to the private sector involvement (PSI) tender launched by the government on Friday for the writedown on the country’s debt.   Finance Minister Evangelos Venizelos put a brave face over the latest rating agency strike by claiming that it was to be expected.   “The S&P move had been announced in advance and all its repercussions have been anticipated, planned and addressed by the relevant decisions at European Council [of EU leaders] and the Eurogroup [of eurozone finance ministers] meetings,” Venizelos said in a statement issued shortly before midnight on Monday.   “The particular downgrades [of Greece to SD and the affected debt issues to ‘D’] will have no impact on the Greek banking system as any effect on its liquidity has already been dealt with by the Bank of Greece and subsequently by the European Financial Stability Facility (EFSF),” noted the minister’s statement.   The second bailout package for Greece, worth 130bn euros, has not yet been finalised, pending completion of the PSI bond swap for a writedown of 53.5 percent on the nominal value of privately held Greek debt.   As part of the deal, holders of Greek debt will receive two-year bonds issued by the EFSF, the eurozone bail-out fund, making up 15 per cent of the old par value. The remaining 31.5 per cent will be new Greek bonds that will mature over 20 years from 2023, paying an average coupon of 3.65 percent.     No ECB collateral     The EU-IMF plan provides for a 35bn euro EFSF stopgap collateral to the ECB in the event that Greek bonds are downgraded to default status and thereby cease to be eligible as collateral for ECB liquidity refinancing of Greek private banks.   Responding to the S&P downgrade, the European Central Bank suspended on Tuesday the use of Greek government bonds as collateral to access central bank loans as Greece.   Greek banks that are affected by the collateral ruling can still borrow cash from the Bank of Greece under emergency liquidity assistance (ELA) provisions under direct government guarantees to the central bank that are not charged on the Greek public debt.   The ECB said it will start accepting Greek bonds again by mid-March when the eurozone plan to provide 36bn euros of supplementary collateral to insure the ECB against losses comes into effect.   This means that the debt downgrade was expected only after common action clauses (CACs) - inserted into Greek bonds on February 24 - were to be activated on March 8-9 to force a minority of bondholders who may be holding out against a voluntary PSI agreed by a majority of at least 66 percent.     But S&P’s downgrade comes at least 10 days before the number of voluntary participants in the proposed PSI bond swap has been confirmed.   “We lowered our sovereign credit ratings on Greece to ‘SD’ following the Greek government’s retroactive insertion of collective action clauses [enforcing losses on investors who do not voluntarily sign up] in the documentation of certain series of its sovereign debt,” a Standard & Poor's Ratings Services statement said.   Insertion vs use of CACs   “In our opinion, Greece's retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring,” S&P added. S&P failed to note, however, that Greek bonds that are not under the jurisdiction of Greek law (as is the majority of 206bn euros worth of bonds eligible for the PSI haircut) already included CACs in the legal terms of their issuance.   Moreover, S&P’s own pronouncement on February 10 said that “retroactive application of collective action clauses would constitute a selective default” but not the mere insertion of such clauses that may never be applied on the bonds if PSI is carried out voluntarily.   Only the enforcement of CACs on PSI holdouts would constitute a credit event and trigger credit-default swaps (CDS) insurance contracts on Greek bonds, according to the rules of the International Swaps & Derivatives Association (ISDA).   The ISDA has clearly stated in December that “the mere introduction of CACs doesn’t in itself trigger CDS claims, though using the CACs does”. and.... German court: parliament panel can't decide bailouts 28 Feb 2012 President of the German Constitutional Court Andreas Vosskuhle (2L) reads the verdict on the role of the German parliament in Europe's EFSF bailout fund in Karlsruhe, 28 February 2012 (Reuters) Germany's top court said on Tuesday a parliamentary committee set up to approve urgent action by the eurozone bailout fund was "in large part" unconstitutional, in a ruling that may hamper Berlin's ability to tackle Europe's debt crisis.   The Constitutional Court verdict said the nine-member panel could approve the purchase of debt on the secondary market by the European Financial Stability Facility (EFSF) bailout fund, but it ruled against other powers including extending loans or preventative credit lines to troubled states such as Greece and the recapitalisation of banks.   The case was brought by two opposition MPs who say that giving the nine-person special committee such influence infringes on the rights of German MPs.   The ruling will not have any impact on Monday's decision by the German parliament to approve a second, 130bn euro bailout package for Greece. Berlin foots a substantial part of that package, as it does for each bailout under the current EFSF.   The special parliamentary panel was set up to take fast and agile decisions on behalf of the powerful Bundestag (lower house) budget committee when it comes to especially urgent or confidential matters.   Following the plaintiffs' win, the decision-making process in Europe's largest economy could be slowed down as it tries to lead the eurozone out of the debt crisis, since either the 41-member budget committee or a full Bundestag session of up to 620 members would have to be called for decisions on bailouts.   While there is growing resistance among German voters to further bailout spending, pressure is also mounting on Berlin from the world's leading economies to drop opposition to increasing the permanent bailout fund - the European Stability Mechanism - in order to free up more international help. But for more aid, the German government must get approval from the parliament's budget committee after the Constitutional Court, in a landmark ruling in September, gave a bigger say to the German parliament on matters involving the EFSF.   The new sub-committee was suspended by the courts in October after two MPs - Social Democrats Swen Schulz and Peter Danckert - lodged a complaint.   They argued that the use of the special committee breaches the constitution as it transfers powers from a full session of the Bundestag on a matter pertaining to the budget.   Pending Tuesday's ruling, any EFSF related legislature has had to go through the plenary of the Bundestag. German Finance Minister Wolfgang Schaeuble has urged the court to allow the committee to function, saying the ability of the EFSF to make a decision must not be jeopardised. (Reuters) and.... Press Watch, Feb 28 by George Gilson 28 Feb 2012 The parliamentary vote today on cutting wages and pensions received broad press coverage, as Premier Lucas Papademos prepares to fly to Brussels for an EU summit. Some newspapers reported that Papademos will discuss development programmes and strategies with European Commission President Jose Manuel Barroso.   In the meantime, the report that 160 German tax officers will be sent to Greece drew broad media attention. The news reinforced the impression that Greece is becoming a fully-fledged German protectorate. On the other hand, many law-abiding Greeks – those salaried employees who are taxed at base – will be glad for any help to combat tax evasion.   The expectation that independent MPs Louka Katseli and Haris Kastanidis may form a Pasok splinter party continued to capture attention. The two were expelled from Pasok’s parliamentary group by George Papandreou, because they voted down the new memorandum. They may be able to attract some of the other MPs who were expelled from Pasok.   The resignation of public order minister Christos Papoutsis – so he can run to replace George Papandreou as Pasok leader – captured broad press attention. Though a possible Papoutsis candidacy was long rumoured, his timing was not the best. His resignation came right after an abortive terrorist bomb attack on an Athens Metro.   “The tax bureau needs its German” read Ethnos’ headline. The humorous headline referred to a popular advertisement, but it also signalled an inconvenient truth – that the state machinery is totally ineffective in crucial areas, such as tax collection.   “They wanted a holocaust in the metro” read another front page title on the abortive bombing. The report said that it was miraculous that the bomb did not explode.   “They were sending us to the IMF since June 2009” read Ta Nea’s headline. The story – which was based on Wikileaks – reported that the US think tank Stratfor was projecting at that time that Greece would require International Monetary Fund assistance. The report also said that the contacts between the Papandreou government and the IMF regarding an aid programme began before the end of 2009, just after Papandreou swept to power. “Juncker torpedoes elections and announces an ND-Pasok grand coalition” reported tabloid Avriani on comments by the Eurozone chief. It said that Juncker warned against voting for anti-memorandum leftwing parties, because that will signal the end of the bailout loan packages.