Greece needs to get a high participation rate to make the debt restructuring plausible, to get the next Troika bailout tranche before their March coupon comes due, which if not paid will cause an all out default. If the Private Sector Involvement on the debt restructuring isn't seen as voluntary, that could and most likely would trigger CDS.
The latest in the the Greek drama is that the IIF (who s representing private debt holders) has said that the holder of Greek Debt have made their maximum offer regarding how much of a loss/haircut they are willing to take. If this is not seen as doable by Greece or if there are enough holdouts, Greece could introduce CACs, "Collective Action Clauses" that are retractive, which would certainly cause the restructuring to be seen as involuntary. The other issue is the ECB's holding's (as the largest holder of Greek debt) and the ECB's position in which it is loathe to accept losses on their Greek debt holdings. Specific clauses could be created to shield the ECB and to some extent, the IMF from taking the PSI losses, but this would set up a bond market that has senior and subordinated bonds and would do an incredible amount of damage to future bond holdings and auctions as the bond holder protections that have been in force of nearly 60 years would be thrown out the window and Portugal, Ireland, Spain and Italy, would certainly look to sabotage their economy to get the same treatment Greece received. Without getting in to all the details, the bottom line would be this, as a bond buyer, would you buy debt that you knew had no protections built in and that you would be likely to take a 50% or more loss on the bond because of a precedent set in Greece? Not only would auctions fail left and right, but current holdings would be liquidated as fast as possible sending all sovereign yields through the roof.
Again, the bottom line is the clock is ticking and Greece is between a rock and a very hard place. It seems almost any direction they take will lead to legal action from all corners. Even Germany has issues as well as the ECB with the Lisbon Treaty.
As I have stated before, late Friday ramps like we saw last week, coming on no news and no evident correlation, seem to me to be a way to lock in long and momentum traders over a weekend that they may otherwise be inclined to sell in to. This sets up a nice bull trap on a Monday gap down which would almost certainly create a negative snow ball effect.
The IIF stating that the private bond holders (many of which are hedge funds recently) have made their final offer, it doesn't sound like a breakthrough in negotiations, but rather a line in the sand that may create another walk out and break down in negotiations as we saw a little over a week ago.
As is always the case, it's not the news, but the market's reaction to the news, and thus far very early indications have not been positive, here are some charts of the opening of the FX market and specifically the EUR/USD in which the Euro has gapped down...
As you would expect, the E-mini futures have been hit pretty hard on the open as well.
As we identified last week, crude continues to face strong headwinds with the FX correlation taking a toll.
As you know, despite geo-political events centering around Iran, I have maintained the model portfolio longer term short positions in oil open as 3C has been showing negative signals that have run counter to common sense re: the geo-politial concerns. Here is the recent action from last week in crude/USO.
Here's the 3C chart.
While our own Credit/Risk Asset vs. Equities models won't be available until the New York open, we can get a quick and dirty look at CONTEXT even though many credit/rate markets are not open yet.
I'm going to have some dinner and take a look at a few other things in the market, if anything interesting pops up, I'll post it.
Have a great week!
