I keep seeing reports that somehow Greece could avoid default if participation is above 90%. It’s nonsense.The only way Greece could avoid using the CAC (and triggering CDS) is by paying out the holdouts in full. There is just no way that will happen. First, because it would cost too much. Second, because it would infuriate those who participated (lawsuits galore). Third, that plan would be a tough secret to keep.
If any bondholders who don’t voluntarily join the PSI aren’t paid out it’s default. It doesn’t matter if 99% volunteer, a bond isn’t a democracy it’s a contract. And if anyone isn’t paid out, it would be an absolute shock if the ISDA doesn’t declare a credit event.
My baseline expectation is around 80% participation with CAC’s and CDS triggered.
That outcome should be fully priced in at this point and have no impact. The problem is that a handful of market participants are absolute idiots (and the stupidity goes right to the top). These people will hit the panic button when the headlines cross. It’s hard to say how numerous they are, certainly they were abundant in the credit crisis.
In theory, the smart money will come in and soak it all up but that is asking a lot in this market. If anything, the time to get short is between when the final results leak out (don’t wait for the official word) and when the CAC’s are triggered. If the euro drops on the CAC announcement, take profits quickly. If the drop is hard enough (+100 pips) consider getting long.
