Try not to read too much into the Greek threats about invoking the CAC and screwing the international bondholders. The knee jerk reaction is to read it as desperation but it’s in their interest to get as high a number as possible.
Obviously, a number under 66.6% is a catastrophe and all bets are off if that happens but it’s very unlikely. Everyone has been guilty of giving the Greek government too much credit but the stakes are high here and they should be able to get it right.
The open question right now is what happens if participation is over 75%?
At 75-85%, the consensus is that CACs will be invoked and that will be that. Those opposed will assuredly launch a legal battle which will take years to decide but the bailout will go ahead and some uncertainty will be removed.
Above 85% is where it starts to get interesting. At around this level Greece will save enough money to get the bailout so officials don’t need to invoke the CAC, although the betting is that they probably will.
If they don’t invoke the CAC they have two options: 1) pay the holdouts out fully 2) default completely on the holdouts.
Option 1 would set a bad precedent but it seems remotely possible if participation is very high (+95%). It would probably avert a credit event and triggering CDS which would make some waves in the CDS market as holders get unexpectedly wiped out but ultimately it would be positive for EUR and risk trades because it would remove most of the uncertainty.
Option 2 is what is spooking markets at the moment. A statement from the Greek public debt management agency today said it “does not contemplate the availability of funds” to pay out those investors. This is a brilliantly ambiguous line that should probably be interpreted to mean they won’t pay 100% (see Option 1) and will invoke the CAC but it could also be taken as a threat to pay zero.
The language is all about coercion. It’s overwhelmingly likely that they will use the CAC and give everyone the same deal but this plants a seed of doubt. Some bondholders are prepared to fight in the courts but others are undecided and this is meant to scare them into following along.
