This haircut business has more complex layers to it than an asymmetric bob, so listen up at the back: if 66% of bondholders sign up to the deal, it’ll trigger a ‘Collective Action Clause’ mechanism, which essentially uses the will of the majority to force the minority to go along with the plan. So far, Greece reckons 60% of bondholders have agreed, so things are looking reasonably positive.
The ‘troika’, though, says it wants 75% of bondholders to sign up to the deal, just to give it that little bit more legitimacy – while Greece itself wants an optimistic 90%. The science bit, as pointed out by investor Patrick Armstrong on this morning’s Today programme, is that if enough bondholders sign up to the deal and Greece gets the amount it needs, the remainder who didn’t sign up could theoretically end up being paid the full amount agreed. But, if everyone says no to the haircut, there wouldn’t be enough to pay anyone. Tricky, huh? So in a way, as Armstrong put it, ‘there’s no incentive to say yes’.
So far, big banks like France’s BNP Paribas and Germany’s Munich Re have signed up to the deal (presumably under a certain amount of government pressure), but small pension and hedge funds have yet to show their support. The worry is that if only the bare minimum of bondholders sign up and the CAC mechanism is triggered, that’ll effectively be Greece admitting defeat, and it’ll set off credit default swaps, insurance-esque policies that pay out in the event of a debtor defaulting. The idea of that is enough to set knees in Europe a-quaking: in 2008, they played a part in the demise of US insurer AIG.
To be fair, there’s only a very slim chance of Greece’s bondholders not agreeing to the deal, but if something does happen to prevent the bailout going through, the troika will almost certainly pull another rabbit out of its hat to prevent a default. There’s far too much capital – political and economic – riding on the outcome.