@ the open 3-8-12

My Big Fat Greek Restructuring – the tender period for the debt restructuring in Greece ends today at 2200 Athens time (1500 EST) so we’ll know the outcome prior to the close of the market (at least we should)…so first the background:

1. Greek bonds held by private investors = €206 billion (best estimate)
2. If the tender gives Greece sufficient votes within the ownership group to execute the Collective Action Clause in the bonds then the private holders will receive new Greek bonds equal to 46.5% of the face amount of the bonds tendered. So Greece would reduce outstanding debt by 0.535 x €206 billion = €110.21. This would result in €95.79 billion of new Greek debt + the roughly €145 billion of remaining “old” Greek debt or a total of €240.8 billion…of course you have to figure that the Greeks will draw all of the new €140 billion three year facility as well which would put them at €380 billion…and the GDP of the country continues to shrink…you get the picture and it ain’t pretty.

So what has to happen?

1. Greece must get at least 50% of the bonds to tender (it is believed that they currently have 60%)
2. 2/3 of those that tender (at least 50%) must then vote to invoke the collection action clause…in all likelihood all would vote for it because there is no upside to them not voting for it. The debt reduction gives Greece the best chance to make some sort of recovery and for bond holders to recoup at least some of their losses.
3. This should happen today (3/8/12)
4. Tomorrow the EMU finance ministers opine on the debt exchange and clear the way for Greece to gain access to the new €140 billion bailout line of credit.
5. Once the collective action clause has been triggered it is expected that the ISDA committee will declare this a “credit event” at which point CDS contracts will act as if a default has occurred…which it has in fact. This probably happens early next week as the committee will likely rule over the weekend.
6. After the CDS contracts declare a default event, broker dealers will get together and determine via an “auction” process what the market value of “old” Greek debt is…say for the sake of argument that it is 22% of face amount. The CDS will then pay-off 100%-22% or 78% x notional value of the CDS contract in cash to holders. There will be no physical settlement since all of the bonds in private hands should be tendered to whichever broker dealers are handling the debt tender and exchange.

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Equity Markets – equity markets in Asia were higher in overnight trading as the view becomes more clear on the Greek debt exchange…European indices are following suit this morning now near their highs for the session and domestic futures also signal a higher open. Today we get weekly jobless claims and ECB and BoE short term rate decisions…will be interesting to hear Draghi’s take on inflation in the EMU and the ECBs potential courses of action, if any…no changes in short term rates are anticipated. Questions regarding global economic fundamentals continue and China will announce manufacturing activity and inflation numbers tomorrow prior to the jobs numbers here.

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Macro, News & Events

Economic Releases

• February Challenger Job Cuts (YoY)…last was 38.9%
• March RBC Consumer Outlook Index….last was 45.1
• Weekly initial jobless claims…351k v. 351k
• Weekly continuing claims…3,400k v. 3,402k

Events – none today

Earnings – none today

Asia, Europe & USA

• Japanese securities regulators are extending the probe into AIJ Investment Advisors to Hong Kong and thus are likely to extend the one-month suspension of the pension fund managers’ ability to transact business. Authorities in Japan shut down AIJ last month amid allegations that the fund was systematically hiding losses as asset positions and valuations could not be explained or proved…most of the money (some $2.3 billion) has so far failed to be accounted for.
• Japan’s Minister of Industry, Yukio Edano, said that he is unable at this point to say how many of Japan’s nuclear reactors will generate electricity in the summer of ’12…currently only 2 of 54 reactors are online with the last slated to be put into cold shut down in April. Concerns are growing that there is not sufficient alternative generation capacity to meet peak needs if the summer heating days are above normal which would mean power outages and lost production which Japan can’t afford. It also ultimately means higher reliance on fossil fuel based electricity generation capacity at a time when fossil fuel prices are surging…nice.
• China will report tomorrow on inflation numbers (the market hopes these are trending down) as well as industrial growth (many think at a two year low) which means for traders that “bad news” is “good news” and that the PBoC could announce more monetary stimulus. Current estimates are that consumer prices were +3.5% in February after +4.5% in January and that output growth was at +12.5% (lowest growth rate since ’09). The government indicated yesterday that exports were below forecast levels. The government earlier this week endorsed higher minimum wages (not exactly an anti-inflation policy) and increased public housing projects in an effort to allay concerns about Chinese growth.
• Bank of Korea leaves short term rates unchanged at 3.25% matching the market’s expectation
• Australian employers cut payrolls in February more than was expected as the unemployment rate rose for the first time since August as a stronger Aussie dollar weighs on economic activity on the island continent…the jobless rate rose from 5.1% to 5.2%.
• The ECB is expected to lift its inflation forecast forecast above the 2% price stability threshold…this could complicate matters for the ECB to continue to step into the breach as the lender of last resort should additional issues crop up over the summer (with Spain or Portugal or Ireland for example)…it likely takes any further cut in short term interest rates (from the current 1% level) off the table. Draghi will speak today after the ECB reviews rate policy.
• Italian bank deposits fell 0.8% in January from a year earlier, the 4th consecutive monthly decline…also bad loans at the country’s banks rose 17.9% (year over year)and loans to the private sector were up 1.6%.
• Bank of England Governor King once again faces the likely prospect that the BoE policy committee will be split on guarding against inflation vs. providing more monetary stimulus for the UK economy as the government continues its austerity move. Expectations are that the BoE will announce no change in short term rates today and that they will maintain the currently announced level of QE (BoE bond buying) @ £50 billion.
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Credit Markets –

Sovereign CDS – CDS spreads are mostly tighter this morning as it appears that Greece will gain a sufficient number of tenders to execute their collective action clause and force all of the other private holders to go along with the debt exchange…while it does mean that a CDS credit event is likely to occur it also means that there isn’t a situation in which Greece has no funds available to fund itself and thus would have to default on all of its outstanding debt…means the ECB and other government entities would lose money and we can’t have that now can we…at last count there was £3.2 billion of net Greek CDS notional contracts outstanding.

US Corporate – Leveraged loan CDS led the way yesterday tightening by 10 bps (+303) while high yield was in 3 bps (+586) and investment grade was in 1 bp (+97)

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Energy Markets – crude prices are higher this morning with the WTI/Brent spread back over $18 / barrel and Brent in euro terms at €94.63/barrel, 2.9% higher than the ’08 peak in Brent crude prices in euro even though its 13.4% lower in dollar terms (i.e. a 16.3% decline in the euro over the same period). Barclay’s says that Iranian crude shipment have fallen by 300 to 400k barrels per day in a sign that sanctions against the country are having an effect on its ability to export crude…of course this is resulting in higher crude prices with Dubai crude up 2.5% overnight.

Futures – the crude futures strip remains relatively flat but continue to increase versus natural gas with the energy equivalence ratio now at 6.4x…

Phillip Pennell, CFA
Turnberry Capital Management
(203) 861-2708 (Direct)
(203) 861-2700 (Trading)
(203) 917-2255 (Mobile)

The information included in the above discussion is not intended to be used as a basis for making investment decisions nor should it be construed as a recommendation by the author to buy or sell any specific security. Individuals should consult their investment advisor prior to making any investment decisions.