There is no door # 4 for the Foreign Law Greek bond holders

Here is some friendly investment advice for those holding a portion of the €18 bn of the “Foreign Law” Greek bonds. You have 3 "doors" to exit your position.

Door #1: If you can still sell your bonds at a premium to the “Greek Law” bonds, that's your best option, but you should sell soon. That premium will be going away shortly and you will have no choice but to participate in the PSI exchange or deliver your bonds to the CDS auction.

Door # 2: If you don’t sell your bonds now, you may have to exchange them in the PSI. In which case your premium to the Greek Law bonds is gone.

Door # 3: When Greece enforces the Collective Action Clause, which they have recently installed into their bonds, the CDS Event of Default will be triggered (subject to ISDA Determinations Committee decision). Your last exit will be to deliver these bonds into the CDS auction.

Many Foreign Law Greek bond investors are holding out for Door #4, in hopes of creating a “blocking position” that would block the CACs already built into these bonds. The thinking is that it would pressure Greece into some sort of negotiations and incremental value would be extracted. But if you are one of those investors, here is some bad news for you. If you haven’t yet exited via the 3 “doors” (above) and still holding the Foreign Law Greek bonds (after the PSI exchange and the CDS auction), there will not be a door #4. Greece will simply not pay you the coupon or the principal (unless of course you are the ECB.) Remember that by deploying the coercive exchange (CAC) on the Greek Law bonds, Greece will have officially defaulted. There is no reason for them to pay you anything, because the rating agencies will already have Greece declared in default and the CDS will have already triggered. A second default that will occur when you don't get your coupon payment will have no incremental consequences for Greece. Thus a blocking position in the Foreign Law Greek bonds is of no value, since these investors have no negotiating leverage. There is nothing they can do to Greece that hasn't already been done.

Some analysts have thought that by defaulting on Foreign Law Greek bonds after the new (“post-PSI”) bonds have been issued, Greece will trigger a cross-default, effectively defaulting on these new bonds as well. But Greece promptly took the cross-default (proposed) provision out of the new bonds. As far as the Greek government is concerned, they will only have the one new set of bonds. And if you held out on the Foreign Law bonds (and did not take doors 1-3), that’s too bad - you'll just end up getting a doughnut.

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