The doubts of the Eurogroup today turn into the anxiety of the markets: Greek government bond swap not going as expected and European stocks all slide into the red. Fears about a possible uncontrolled default by Athens are growing again everywhere, also because last Thursday the leaders of the Eurozone disbursement of the new aid package postponed to the Greek country (130 billion euros), subordinating it precisely to the "success of the PSI".
The acronym stands for "Private Sector Involvement", the plan which provides for the involvement of private creditors in the rescue of Greece. This is an unprecedented financial transaction: in essence, the Greek government bonds in the hands of banks, insurance companies, investment funds, but also those in the portfolios of simple savers, should suffer a cut equal to 53,3% of the nominal value, in most cases by substitution with other bonds with longer maturity and lower yields. A real breath of fresh air for Athens, which would see its public debt reduced by at least 100 billion euros.
Le subscriptions to the swap will remain open until 9 March, then Europe will draw the conclusions. However, there is no guarantee that the plan will work: to speak of a real "success", the PSI should be accepted by at least 90% of private creditors. But that doesn't necessarily happen. And, surprisingly, the fault could lie with the smallest investors, the retail ones, who hold between 14 and 16 billion in Greek bonds.
While the big companies have already entered swap-related losses on their balance sheets, in many cases under strong institutional pressure, savers could pull themselves out of the game in the hope of cashing in the refunds of the CDs. In fact, if the swap fails, Greece could be forced to activate collective action clauses (Cac), imposing losses even on those who have not adhered to the plan.
At that point the Isda, the international swaps and derivatives association, may review its decision on the Greek debt: while voluntary participation did not represent a "credit event", failure of the plan would create a default status which would trigger repayments on credit default swaps (CDS), i.e. derivative securities which function as life insurance of the bonds (in this case the Greek government bonds).
THEDomino effect that would follow is currently not quantifiable with precision. Traded on the over-the-counter (unregulated) market, CDSs have proliferated amidst anarchy, creating a web of financial interconnections with the potential to disrupt several balance sheets. And it's not science fiction: it already happened four years ago with Lehman Brothers.
