Who will roll-up, roll-up – to the Greek roll-over?

Posted by Tracy Alloway on Jun 24 08:38. 4 comments | Share

DiggRedditLinkedInFacebookdeliciousMixxPropellerYahoo! BuzzstumbleupontwitterRoll-over, roll-over send … no one right over?

Citi argues on Friday that getting the holders of shorter-term Greek debt to roll-over their holdings into longer-term bonds will be no easy feat, even as the eurozone seems to be pressing ahead with the plan. More…

Roll-over, roll-over send … no one right over?

Citi argues on Friday that getting the holders of shorter-term Greek debt to roll-over their holdings into longer-term bonds will be no easy feat, even as the eurozone seems to be pressing ahead with the plan.

Here’s the thinking, from Citi’s Mark Schofield.

Non-bank investors (both Greek and non-Greek) own about 45% of the total stock of debt but much of this, particularly the portion held by pension funds and insurance companies, is likely to be long-term debt rather than paper maturing in 2012-13. The remainder is likely to be divided among traditional investment funds and private investors, who are unlikely to be incentivized to roll over their holdings at levels that are economically viable for Greece or in the event of a default action being declared by a ratings agency. We will examine this conundrum in more detail later in this article, but we consequently see little potential for a significant roll-over from this group of investors.

The vast majority of the debt maturing in the next two years is likely to be held by Greek and foreign banks and to some extent the ECB and the Bank of Greece. The ECB has already intimated that it would not consider rolling over its debt. This may change in the future, but for now we must assume that it is not on the table.

Foreign banks will struggle to justify rolling existing holdings unless the rate at which they can do so is economically viable; this is the same conundrum that faces other non-bank investors outside Greece. Unfortunately the current market forwards, while potentially attractive to investors, are not sustainable for Greece and would, if locked in, lead very quickly to insolvency, in our view. However, to roll at off-market levels that would be sustainable for Greece risks triggering a default event in the eyes of the ratings agencies and/or the CDS determination panel … We think it highly unlikely that a significant proportion of non-Greek banks would take up a voluntary roll-over offer without significant coercion (which itself could trigger a default event).

In Figure 8 we make an estimate of the potential uptake for a debt rollover based on what we think the likely maturity split held by each investor type is and assuming roll-over rates based on the above views.

Whilst this is purely our best estimate, based on assumptions that we have made about portfolio splits and willingness and incentive to roll over maturing bonds, it does highlight an issue in that even before financing ongoing deficit spending, there is likely to be a significant further cash injection required.

Does someone want a sweetener? Credit enhancement, perhaps? It sounds like it.

To be fair, once Greece defaults it will be super-hard for banks to justify to their investors just why — back in 2011 — they decided to roll into longer-term bonds worth much less. There’s still this thing called fiduciary duty, so expect the lawsuits to fly should a roll-over and subsequent default happen.

Related links:
Cool reception for Greek debt plan – FT
Europe’s big box-ticking exercise – FT Alphaville
+++Vienna Plus+++ – FT Alphaville
The Vienna Initiative is already here – FT Alphaville

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