Greek Update

Following the Greek PSI in March, one would have thought Greece is out of the news until next month's election. However, the risk of another near-term default has increased, putting it back in the spotlight.

Investors who hold Greek bonds that are government by foreign (non-Greek) laws are balking at "voluntary" debt forgiveness that private sector that held Greek bonds governed by Greek law provided.

The bonds governed by foreign law have to been voted on each individual and the investors appear to have blocked restructuring in 20 of the 36 cases. Altogether there is about $26.8 bln at stake. Of this amount, $15.3 bln appear to have resolved--ie, debt forgiveness. That leave about $11.5 bln that is the sticking point. One of those outstanding is a 450 mln euro FRN that is due May 15. It has a 30-day grace period to make the payment, according to press reports.

There is some fear that Greece could default on this sending it to a non-Greek court for resolution. Theoretically, Greece could just pay the full amount, but it does not seem so inclined and raises equitable treatment of private investors. Greece could refuse to pay anything, which it appears to have threatened to do, but this also raises questions of equitable treatment. Greece could negotiate with these creditors to find a middle ground, but this seems unlikely. The holders of Greek bonds that are governed under non-Greek law have until April 4th to declare their intent.

Turning to politics, amendments to key spending legislation are expected to be submitted over the next couple of weeks. There is a loophole in the procedural rules that allow amendments to be adopted even if there was not prior cabinet approval. This injects a greater element of uncertainty, especially ahead of the May 6th election. The latest polls shows the Socialists gaining 4.5 percentage points to 15.5% and the New Democracy slipping 2.5 points to 22.5%.

There has been some thought that the current coalition government could be maintained and technocrat PM Paopademos actually staying on but as ice PM, with Samaras becoming PM. While this may be the best scenario for investors, the risk is that the public, which is facing even more austerity measures protests by withdrawing support from the major two parties. A fragmented parliament still seems like the most likely outcome at this juncture.

The new Greek 10-year bond yield rose today to 20.55%. It is the fifth consecutive session that yields have risen and are at new highs since the new bonds were issued in early March. In the past five sessions, the yield has risen 50 bp. The German 10-year yields has fallen 16 bp. The spread stands at 1824 bp, widening by 66 bp or 3% over this period.