Market Anxiety Over Greek PSI Is High

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Marc Chandler

NEW YORK ( BBH FX Strategy) -- Uncertainty over the participation in the Greek bond swap is a major source of anxiety Tuesday.

Rumors circulating earlier that the Private Sector Involvement "invitation" would be extended by a week due to low participation have been officially denied, but rumors illustrate the market's apprehensions.

It does appear that participation will be sufficient to incorporate the collective action clauses (66%), but not the 90% official goal.

The Greek government has signaled willingness to invoke the collective action clauses, or CACs, if necessary. This may have been an attempt to demonstrate its resolve as surely the preferred outcome is to maintain the veneer of voluntarism. Moreover, invoking the CACs would most likely be regarded as a credit event by ISDA and trigger the credit default swaps.

Among the 13 members of the International Institute of Finance steering committee, 12 indicated they would in fact participate in the PSI. The one holdout so far is the Landesbank Baden-Wuerttemberg of Germany.

Ironically, German banks reportedly accounted for more than half of the 800 banks that participated in the second long-term refinancing operation, and some observers saw a link between LTRO participation and PSI participation.

In any event, the 12 members of IIF steering committee that will participate account for an estimated 40 billion euros. Greek and Cyprus banks reportedly have indicated they will participate as well. They account for roughly another 40 billion to 45 billion euros. That brings the back-of-the-envelope calculation to about 80 billion to 85 billion euros.

To put the CACs into place, Greece needs to get 50% of all the bonds in question (in private hands and under Greek law), which total about 177 billion euros. Thus, at this juncture, officials can be confident that the CACs will be adopted.

However, there are almost 20 billion euros of Greek bonds that are governed by foreign law, primarily English law. And it appears that this is where some hedge funds are trying secure a blocking position.

For example, some press reports suggest that a 2.12 billion Swiss franc bond is one of the focal points for this strategy. Hedge funds are believed to hold at least 30% of this issue and are trying to organize themselves to secure a blocking position that would ensure either being paid in full by Greece, or triggering the CDS that would make them whole.

In recent days, the prices of Greek CDS have risen as more investors have suspected that a credit event may be triggered after all and have sought protection.

On balance, the current available information set suggests participation is coming in around 75% to 80%. The low end would more than likely see the CACs triggered. At the high end -- say 80% to 85% -- it is possible the Greek government does not trigger the CACs.

If the CACs are triggered, there likely will be fallout in the peripheral countries, including Spain and Italy. There also likely will be negative repercussions on financial sector shares.

Currencies such as the Australian and New Zealand dollars as well as the Swedish krona would likely be sold off. Among the majors, the dollar and yen are likely to outperform.

Emerging-market currencies would in general also be sold off. Equities would be sold. Core bonds, like those from Germany, the U.K. and the U.S. likely would outperform.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.