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Markets expect Greece to default

19 January 2012 / 20:01:23  GRReporter
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Another meeting of the Executive Director of the Institute of International Finance Charles Dallara with Greek Prime Minister Lucas Papademos is expected in the late evening hours. Charles Dallara arrived in Athens last night to resume the negotiations on PSI - the involvement of private creditors in the Greek debt haircut - interrupted on Friday. Last night, the two men talked more than two hours without making any statement. The press secretary of the Institute of International Finance, called by Dallara himself, arrived in Athens today too. This means that important news is to come. It is only known at present that Prime Minister Papademos will make a statement in the late evening hours.
    The war of nerves between the Greek Government, instigated by European politicians and the International Monetary Fund for an aggressive attack and private creditors, who have purchased Greek securities, is at its peak. In interviews for several U.S. media, Lucas Papademos threatened hedge funds that he would legislatively trigger the so-called Collective Action Clauses, which will require the involvement of all creditors in the 50% cut, whether they want it or not. Hedge funds, in turn, responded that they would bring legal proceedings against Greece, including at the European Court of Human Rights. In Europe, the title is a human right.
    Banks are not happy with their involvement in the PSI procedure either, but they have no choice. Not only strong political pressure is exerted on them, but also pressure from the European Central Bank, which has implicitly threatened them to stop lending to those that do not "voluntarily"  enter into the debt cut. This is the dilemma of European banks, especially of Greek ones and that is why their executive managers are waiting to see what troubles politicians will get them into to start assessing the damage. So far, European Union leaders have pledged that Greece is the only country in the eurozone for which private creditors will be required to voluntarily write off debts. But who believes European politicians now.  
    Surely, the markets do not. For them, Greece is now defaulting. Fitch Agency, for example, is preparing to put Greece in a state of "temporary failure". Paul Rawkins, analyst for Greece, has stated that regardless of the size of losses in net present value, this is default. The agency will maintain this rating for a certain period of time until it is decided how to evaluate new bonds. Currently, Fitch has put Greece in the CCC category, i.e. a step away from default. Another major credit rating agency, Standard & Poor's, has forecasted that the default of Greece is inevitable and close.
    "People often ask if Greece is going to default which ... is a misnomer because Greece is (already) defaulting," said Richard McGuire, a strategist at Dutch bank Rabobank. The question is how the bankruptcy is to be called - controlled, partial, temporary ... All negotiating parties have an interest in avoiding uncontrolled bankruptcy.
    Another question is whether it will trigger the payment of CDS insurances. Credit Default Swaps are financial tools that protect the investors' money if companies or countries are not able to repay their debts. Given that Athens has forced its creditors to suffer losses, such insurances are to be paid. Otherwise, they will lose their meaning, and investors will no longer think about the European South. "Triggering the CDS for Greece is the right thing to do because in the end with Greece it's already in default so it should be triggered," said Alessandro Giansanti, a fixed-income strategist at ING in Amsterdam.    
    Today, the Athens Stock Exchange has registered an increase as if to oppose investor expectations for default. Its index has jumped by 2.94% and reached 689.75 points.

    On Monday, the finance ministers of the eurozone have to discuss the outcome of the negotiations between the Greek government and its private creditors and after examining the data, they have to calculate again the amount Greece needs to avoid the worst of it. On Tuesday in Geneva there will be the official press conference of the Institute of International Finance, which is the official representative of the private creditors of Athens.

Tags: PSICDSCharles DallaraGreece defaultPrivate creditorsHedge fundsBanksBonds
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