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Greece isn’t offering its private bondholders too much under the “voluntary” debt restructuring. S&P already downgraded Greece’s credit rating to “Selective Default” after the Collective Action Clauses were introduced.

The bond swap is a critical part of the second Greek bailout package. The tentative deadline (as any deadline around this crisis) is March 8th, when the ECB meets for its rate decision. Will volunteers be found? There’s a lot of room for doubt.

One of the achievements reached in that long night in Brussels was the larger haircut that private bondholders were forced to pay.

They agreed to a nominal haircut of 53.5%. A cut of 21% was first discussed in the July 21 2011 summit. It was then raised to 50% in October. In real terms, it’s more than 53.5%, but rather 73-74%.

This “generosity” imposed on bondholders could certainly backfire. Why?

Credit Default Swaps. Some hedge funds insured themselves using CDS against a Greek default. If they can expect to get only 26-27% of the value of the bonds, perhaps they can make more money by losing all 100% on bonds in a full default, and receive more money via the CDS payouts.

During the negotiations, the Madrid based Vega hedge fund walked out of negotiations. They are not the only ones that have such an interest. Talks fell apart at one point.

Greece passed laws that will require a majority of two thirds, 66% of bondholders to agree to a haircut in order to impose it on all the others. It’s called Collective Action Clauses. Nevertheless, with such a high haircut, they might not reach the goal of 66%.

This article is part of the special report about the Greek endgame. You can download it by joining the newsletter in the form below, which appears on any article on  Forex Crunch.

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