Athens is threatening not to pay holdouts in its debt swap, dispelling any pretence that the restructuring will be "voluntary." The sabre-rattling is spooking markets, but an outbreak of minor chaos should help bring stragglers on board. A disorderly default still looks remote.
The Greek warning that no money is available to pay the creditors who might refuse the swap is clearly designed to spook creditors into signing up. The bigger fear is that the deal, which requires creditors owning €206-billion ($270-billion) of Greek bonds to take losses of over 70 per cent, will unravel. If so, the country's second euro zone bailout is off, and chaos would follow.
Greece needs a take-up of 90 per cent or more for the swap to proceed. It's unlikely that 90 per cent of creditors will agree, so collective action clauses, which force creditors into the restructurings once a minimum number has been agreed, will likely be needed. Some 86 per cent, or €177-billion, of the bonds are governed by Greek law. Their owners can be forced into the exchange through a CAC trigger if two-thirds of bondholders voting on the proposal agree to the changes. There is also about €7.9-billion of debt issued by Greek entities, and guaranteed by the government, most of which is also under Greek law. Then there are foreign-law bonds, totalling about €20-billion. These are more fiddly, as their CAC thresholds must be approved for each security, making it easier for creditors to block them.
Once Greek-law bonds are spoken for, the 90-per-cent threshold should be hit, and chaos averted. It wouldn't be catastrophic if Greece then defaults on the holdouts. However, the latest threats have scrapped any illusions that Greece's deal with its private creditors will be "voluntary." Once collective action clauses are agreed on, credit-default swaps will be triggered. Even if a chaotic default is avoided, the swap will leave a bad taste in bondholders' mouths. Private creditors will be forced to take a loss, whereas public ones will be spared.
Ironically the bigger source of concern for bondholders might not be that the restructuring will be chaotic, but that it will prove too orderly. This might encourage euro zone officials to try it again for other troubled peripheral states, particularly Portugal. Taboos, once broken, aren't taboo any longer.