Analysis of Greece’s “Trichet Plan” Restructuring

By Global Macro Monitor

We’ve done some quick analysis of Greece’s commercial bank “Trichet Plan” restructuring announced late last night (click here for term sheet) by the Institute of International Finance (IIF). The IIF is a consortium of the world’s largest banks.

Interestingly, the plan looks very similar to the one presented on this blog in late April. The structure uses the Brady Plan framework from late 1980’s and early ‘90’s and is really the first step to deal with bond maturities coming do over the next few years.

The realized debt and debt service relief to Greece will not be known until the final deal is closed. It is a beginning and huge step in the right direction as it finally addresses the structural problem of Greek’s debt overhang.

The table below shows that assuming a Greek sovereign yield of 15 percent, just about 100 bps below its current 10-year yield, the three options will trade in the secondary market from 59 percent to 68 percent of face value, much higher than the current price of Greece debt. The authorities who negotiated the deal tried to make the options in the menu equivalent based on a Greek sovereign yield of 9 percent. They state in the term sheet “all instruments will be priced to be economically equivalent at 21 NPV discount at a discount rate of 9%.”

This doesn’t mean that it will provide Greece with a 21 percent haircut, but that the bonds will trade at 21 percent discount in the secondary market if Greek sovereign yields are 9 percent. Like many other issues, including contributions to public pensions or estimating the cost of global warming, it all comes down to the discount rate assumption. The Mexico Brady Plan Bank Advisory Committee spent several weeks debating the discount rate, which had a large impact on the final structure of Mexico’s deal.

Many will dismiss this deal as it does not solve and provides only limited relief to Greece’s debt overhang, but it’s a start and makes Greece’s debt problem much more manageable over the short-term. There will be many positive externalities from the deal not to mention the increase in confidence and higher bond prices, which will strengthen the balance of sheet of Greece’s bank creditors. Furthermore, at a 15 percent yield, which still incorporates a relatively high probability of default, more than half of the market value of the Par Bond, for example is the AAA zero coupon collateral.

At the end of the day, the Brady Plan did not provide much net debt relief to the participating countries and was even initially criticized as so by the IMF. Its success was really the result of the positive externalities generated from reducing debt rather than increasing it. In addition, Greece will have more time to reduce its debt through buybacks and debt swaps, such as debt-for-equity, debt-for-environment, and debt-for-education swaps.

There are still many issues unanswered, including how to deal with the free rider problem as no doubt vulture funds have and will be buying Greek bonds in the secondary in the hope of being paid in full. However, many of the largest European banks and largest creditors to Greece have already signed onto to the deal, including Deutsche Bank, BNP Paribas, Société Générale, Commerzbank, and ING. Step by step. No magic solutions.

Our sense is that shorts are going to be reaching for the KY. Godspeed, Greece.

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