At the end of last week, the finance ministers of the euro bloc approved the last phase of assistance for Greece. The European Union will lend the Greek government 12 billion euros, the last tranche of aid totaling 110 billion euros. The International Monetary Fund is also expected to approve further aid to Greece after Athens managed to push through an austerity plan, and after it fulfills other conditions.
Investors seem to be breathing easier, according to their reactions on the market. But holders of Greek government bonds, which are mostly banks around the world, should be worried, says Steven Major, managing director for global bond strategy at HSBC.
The aid programs for Greece are the right thing to do, he says. But they won't help private bondholders, which includes the banks. Greece is heading for default: "It's just a matter of time," he says definitively. What default will mean has yet to be seen - it could pan out in different ways. But, he points out, Greece has the lowest debt rating in the world other than Ecuador.
Default has a number of formal definitions. The relevant one for the CDS market (sovereign default insurance ) is inability to repay debt that comes due. As far as the credit rating agencies are concerned, postponing repayment of bonds is default.
The credit rating agencies have made clear that Greece is heading for selective default, Major explains, which is exactly the case in Ireland and Portugal today. The various bailout arrangements enable those two countries to replace bonds coming due with new debt that matures later.
The institutions involved in rescuing Greece, Portugal and Ireland are the International Monetary Fund, the European Union and the European System of Financial Supervisors. These institutions are increasing their share of Greek debt - but paradoxically, that's exactly why private bondholders should worry, he says.
Crunch time will come in 2013, Major predicts. That's when the stabilization mechanisms built into the agreements will come into force. By that time, the institutions' share of Greek debt will have reached half, and that's important. A nation can't go into default with the IMF: none ever have. The IMF and the European institutions have ways to assure that the debtors will pay up.
And that means bonds issued by these countries that were bought in recent years and held by private bondholders aren't the same bonds they hold today. The bonds they hold today are far riskier because the countries will repay the institutions first, and the institutions hold far more of the debt than before.
What the aid packages boil down to is somebody pushing ahead in the line to repayment, Major explains metaphorically.
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