Efficient markets – Quick check Greece 2012 bond

So we have a new “PSI” package for Greece.

If I understood everything correctly, as a current holder of the March 2012 bond, one will receive the following securities (example: 10.000 EUR nominal):

– 15% or 1.500 EUR in EFSF securities, which should be as good as cash
– 430 EUR or 4.3% of accrued interest in EFSF securities
– 31.5% in 20 different (!!!!) new Greek Government bonds. This means one will get 20 different bonds at a nominal value o EUR 157.50 each !!!
– a currently undefined “warrant” on the Greek GDP developement

At the German stock exchange, the march bond is currently selling around 37%. The August 2012 bond is selling at 26%, the longer bonds around 23%.

It seems that still a lot of people seem to believe that they will be paid in full in march. Because if you calculate the implict expected price of the new bonds at the 35% price tag, you would end up with a value of ~57% for the new bonds which is totally unrealistic.

The implict price for the new bonds priced into the longer bonds is more like 20% of the (new) nominal value.

There is no reason that the new Greek bonds should tarde significantly above the old bonds as the amount of debt will more or less remain constant and since last Friday, every private bondholder is effectively subordinated to the ECB.

So as a relative value trade, one could now short the march 2012 bond against the August 2012 bond if this would be theoretically possible.

For any “small money” gamblers, the transaction costs for having to sell at least 22 different investments after the exchange will further diminish any possible gains.

On the opther hand, this could open up some interesting opportunities AFTER the exchange, I am especially looking forward to the “GDP warrant”.


  • Zero Hedge comment recommending buying the march bond:


    I think the main mistake in this post is the assumption that a credit event will be avoided.

    This is wrong in my opinion, a credit event will definitely happen. The “hold out” strategy willnot work under Greek law bonds.

  • Concerning the GDP warrant: Argentina seems to have used this structure too. Maybe a good proxy for Greece.

  • Yes, the GDP warrant will be much fun. I actually view it is a smart way to solve the moral hazard that dominates the entire debate around “private sector participation”.

    Likely, the warrant meets all criteria of an investment that will get misunderstood at some point:

    – obscure
    – probably pari passu with equity and hence inefficient for FIs to hold under Basel III
    – non-linear payoff structure
    – hard-to-hedge underlying

    Love it!!!

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