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If you wondered why Greece got its 130 billion euro bailout, here is your answer: Greece borrowed a lot of money from investment banks, hedge funds and other financial institutions, and it owes them 14.4 billion euros by March 20.
Today starts the beginning of a 10-day-long adventure: the financial institutions and banks that own Greek bonds will turn in their old bonds and get new ones that are easier for Greece to pay. Then the financial institutions will decide whether they will accept the terms of the new bonds.
Earlier this week, a committee representing the bondholders said it sounded like a fair deal – but, with Greece, you never know if things will stick.
This can all sound pretty arcane, but it’s actually a good insight into how Wall Street works: the concept of “show me the money.” put yourself in the shoes of a Greek bondholder: is this deal good enough to accept? Will Greece get its bailout? We won’t spoil the ending, but…
….Okay, we will. Yes. Greece will be saved. But you can get a pretty good insight into what makes the financial world tick with the explanation below.
Today, Barclays broke down the package in a nice research report. Easy Street translates in a handy Q&A format.
If I’m a Greek bondholder, I’m trading in my old Greek bonds. Those bonds are mostly maturing over 10 years. I’m agreeing to turn them in and accept a package of three things:
Barclays estimates that the value of my new package is worth 26.6% of my old bonds. Which means I’m losing about 74% of the value of my old bonds. But again: I should be happy, because at least I’m not losing 100% of their value.
Well, the face value of my new bonds are worth $46.50 – in 2042, when I’m supposed to get paid! Until then, I just get some interest payments. So the market tells me how much my $46.50-in-2042 is worth today. Essentially, the current value of my bonds is whatever the market decides they’re worth, based on my chances of getting paid back and how well Greece is doing. Right now, the market is telling me that my new Greek bonds are kind of risky. So Barclays estimates that the current value, today, of those new Greek bonds I’m getting is nowhere near $46.50 – it’s really something like $10.90 for the new bond and $14.70 for my other bond – the one from the EFSF bond fund – is probably around $14.70. And throw in $1 for that bond related to the Greek GDP.***
All together, the current value of my whole package comes to something like $26.60 compared to my original $100 – and thus, I’m losing about 74% of the value.
It depends on how Greece does in the future and all that – but Barclays predicts that the whole package should give bondholders around 26.6% of the value of their original bonds. In the harshest bailout in recent memory – that of Argentina in 2001 – bondholders got 27% of their original package. So the Greek deal is not as favorable to bondholders as Argentina – which itself was a deal so harsh that only 76% of bondholders accepted it.
Greece will get 100% acceptance, however, even if it’s a better deal.
We talked to Guy LeBas at Janney Montgomery Scott, who laughed as he called the Greek deal “voluntary.”He told us, “It’s voluntary in the sense that bondholders have an appearance of a choice: ‘We’re asking politely before we force you to.'”
Greece has an entire continent’s financial backing in trying to help it gain its footing and pressuring bondholders to accept less money; Argentina had only itself against the world.
An even better twist: if any bondholders don’t accept the Greek deal, Greece will pass a law forcing them to. The country will make it illegal for bondholders not to accept the offer. But if that happens, the deal won’t be called “voluntary” any more.
Some investors bought credit default swaps that will pay them money if Greece defaults. This is often called “insurance.” Let’s say I bought credit default swaps that will pay me $1000 if Greece defaults on its debt. If the bond offer is voluntary, I won’t get my $1000. If the bond offer is forced – if it’s involuntary – then I get my $1000. This matters because if I collect my insurance, the banks who provided me with the contract have to pay me. And a lot of those banks, especially the European ones, don’t have much money lying around to pay me.
Barclays provides a handy calendary, of sorts. Here’s what to look for.
February 24: Greece makes its offer to bondholders.
March 9: Deadline for investors to decide whether they will accept the deal, and reply to the Greek government.
March 9-12: The official bond exchange for most of Greece’s bonds takes place. Documents fly through the ether!
March 20: Greece pays its 14.4 billion euro bond payment.
Early April:The bond exchange takes place for the rest of Greece’s bonds.
Any other questions? Add them in the comments below.
***I clarified that paragraph to break down the bond values more easily. Thanks to reader Chris, below.
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