Who owns the Greek Government debt and why restructuring is not so easy

With all the traditional and online financial press referring to the possibility of a Greek restructuring, it is crucial to have more information regarding the holders of the Greek debt.  Due to the EU/IMF bailout package of EUR 110bln, approved one year ago, and the direct bond purchase program by the ECB, the allocation of Greek debt has changed significantly. EU/IMF and ECB currently hold a significant proportion of Greek Government bonds (presented in detail at the table below), while last year they were missing from that table, as the burden of Greek debt was mainly on foreign banks and other institutional investors (about 70% of total Greek debt).

According to the Bank for International Settlements, the biggest potential losers from a possible haircut on Greek debt would still be the German non-quoted banks. As of Q4-2010, German and French banks have respectively 9,2% and 20% of their total peripheral Europe exposure tied to Greece.

Holders of Greek Government Bonds and debt, in billion EUR
Greek Banks	56
Other European Banks	50
ECB (direct holdings, nominal value)	50
Central Bank of Greece	10
Greek Social securities/other government	30
Other Investors	120
Total Government Bonds	260
+ EU/IMF loans already disbursed	53
Total debt	310

Source: BIS

What we are missing from the above data is the amount of CDS or other hedging strategies, that the foreign holders of the Greek debt have used, in order to protect themselves, as well as ECB’s big exposure to Greece through its lending to Greek banks (check Tracy Alloway’s excellent article, citing JPMorgan’s estimates on the issue: http://ftalphaville.ft.com/blog/2011/05/09/563016/) .

Sovereign CDS market is an OTC market, meaning that there is not enough transparency. Consequently,  we do not have access to quality facts, ie which part of the traded amounts is invested for hedging purposes and which part is on naked CDS positions, effectively betting on a Greek default.

The record costs for insuring against a possible default of Greece, Ireland and Portugal is a clear indication of what the big players aim at, BUT it's not clear yet if the decision makers in the EU are ready to satisfy them. In the sovereign CDS market the most common credit event, that can trigger the payment of the insurance, is the restructuring of the issuer’s debt, so there is an important incentive here.  During the last month, there have been rumors that EU authorities are looking for a way to avoid the CDS triggering in case of a Greek default, causing the reactions of traders using those instruments and hoping for a restructuring.

Although the decision on the restructuring is a mainly political issue, some people are already making fortunes from the Eurozone debt crisis.  The credit agencies’ decision to further downgrade Greece, is another way to push for a solution in the EU debt problem and possibly capitalize on naked CDS positions.

Investors need to be cautious when evaluating their portfolio objectives in that volatile environment. If it appears that CDS do not protect the holders of the underlying instrument, it will definitely hurt the validity of that market. The Greek debt crisis is part of a wider debt crisis in Eurozone and its progress will affect other markets as well. In the FX space, EURO has weakened suddenly towards USD and might return to the 1,35-1,40 territory again, where it will be a good level for going long on EUR.

It is urgent for The Greek government to act fast, so that to secure the best solution for the country: (as) the more they delay, the harder will be for them to negotiate on their terms. Since 2010, a big part of Greek debt is transferred from the hands of mainly German and French institutions to ECB and IMF, meaning that the political decision might come easier for them and it definitely won’t be in favor of the Greek people. Unfortunately, the progress on the structural reforms is extremely slow and the austerity measures are not enough to change the negative momentum. Greek government needs to take brave political decisions and restore trust, by solving decade-long problems like corruption, tax evasion and weak productivity in public sector. EU/IMF officials observe all these weak points and keep asking for more action. As a result, the markets keep asking for restructuring as they believe that all this debt is too much to handle.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.