A 68% haircut for Greece’s bonds? And the CDS?

By Tania Suárez, in Madrid | The markets are looking very closely at Greece after the negotiations for the bailout froze due to issues involving the private sector participation. The press is now speculating over a possible 68% haircut to bear by creditors as reported in the Financial Times on Wednesday.

As Nordkapp analysts explain this is the road toward a deleveraging frame

“upon which the solutions to the European over-indebtedness could be based.”

Santander analysts also consider this haircut as the real step toward a sustained improvement in credit flows. Nevertheless, they say that even though the Institute of International Finance may reach an agreement with the EU, it is not quite clear that all of the banks involved will participate; they add that this situation

“could end up forcing the inclusion and application of the Collective Action Clause.”

This would unleash the event credits and would activate the payment of the CDS… which in the end also cover more or less the same banks. This is the issue: how can the CDS activation be avoided, a market that fooled the EU thanks to its opaqueness and ability to alter the issuance market? (Since the ECB started intervening in the market, the correlation between spread and the CDS sovereign bond of the European periphery has widened its range a great deal.)

Greek debts held by European banks and capital requirements [EBA]

At Afi, they insist that a greater haircut on debt held by the private investors would facilitate

“the return of public finances to dynamics that would be sustainable in the long term,” especially when taking into account that “the target volume that would be subject to exchange is of 55% of the total outstanding amount, about €200 billion.”

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