Greek PSI Participation Rate Spin…

I’m already sick of the spin. The only number that matters is 100%. They didn’t get it. They will CAC (in fact they may already have done it).  CDS will be triggered. This is the biggest sovereign default ever.

Those who agreed either had no choice – banks and regulated entities – or saw no good reason to attract attention to themselves. All the 85% participation tells us is there are still a lot of banks who took on lots of risk and made poor decisions. That’s it. This isn’t a “popularity” contest or an “endorsement” of the process, it is a function of what sort of entities held the debt.

What happens next?

The key will be the flows from the weakest banks.  They really have 2 options. In theory they could add to their Greek bond positions, but that is highly unlikely.  They could keep the new PSI bonds and mark them at par and mark the EFSF bonds at par as well. They would only take a hit of 53.5% if they did it. The accountants would let them do it, just like they have let them keep bonds at par for many non mark to market banks.  This is good for the secondary market price of the new bonds.  Some might finally say no mas, take the full hit, sell the bonds and move on. They aren’t necessarily forced sellers, but this is the flow the street will lean on.

CDS holders have the most incentive to drive down the price of the longest dated post PSI bonds as they are cheapest to deliver and will be used in the CDS auction process (unless some English law bonds get defaulted on and are still out there at time of the auction).

Basis package players who will now get new bonds after being CAC’d will use their bond inventory to lean on prices.

At some point, probably after CDS and whatever lawsuits related to the bonds themselves come out, some dealer, probably a big bank with LTRO money will say the new bonds look cheap and try to drive them higher, but in near term I expect market for post PSI bonds to trade heavy.

Lots of complications out there, not the least of which is the uncertainty surrounding English law bonds, so the situation will remain fluid.

What is certain is that any non government, non quasi government, non central bank, bond holder is subordinated and runs the risk of being “asked to do what is right” again, and again.

Too bad we have moved to an all electronic system. It would make great television to watch a truck piled with 4.3 billion of Euros leave the ECB and arrive at Greece, where it would be unloaded, then reloaded and driven back to the ECB for their March 20th bond payment. It would probably make a great heist film featuring Brad Pitt.