With fears of a Greek exit from the euro cycling back up, it seems worth updating the figures of an ASR article from February on what that would do to bonds backed by Greek assets.
The thesis remains the same: investors in the 16.64 billion ($18.54 billion) of total Greek securitizations would be wise to look to Argentina in a Grexit scenario.
After Argentina abandoned its currency peg to the dollar in early 2002, the peso fell as much as 75% against the greenback. In tandem with cutting loose the currency, the government switched all local dollar debt under $100,000, such as mortgages, into pesos.
Securitizations denominated in dollars were suddenly backed by assets in a currency with a quarter of the dollar’s value.
The flows into those deals — now in devalued pesos — were, in many cases, no longer enough to cover payments to bondholders, still being made in dollars. This shortfall sparked a wave of defaults.
Investors in Banco Hipotecario Nacional's $616-million of mortgage-backed securities lost money largely for this reason.
Something similar would happen in Greece if the country re-introduced its own currency, a prospect now given more than a 30% chance by bookmakers and traders, according to the BBC.
“The notes would be likely to remain in euros, and the mortgages would get redenominated,” said Dipesh Mehta, a director of securitization research research at Barclays. “There would be a huge currency mismatch immediately and that would be the biggest risk.”
In this scenario, there would be a steep risk of a principal writedown.
Post-Grexit securitizations could also face capital controls, said Ian Sideris, a partner at Simmons & Simmons.
The Greek government might institute measures to slow outflows of foreign currency or prevent bank runs, a typical move by a sovereign after a drastic devaluation. This could hinder payments to issuers in Greek securitizations with accounts outside of Greece apart from disrupting other flows necessary for investors to receive payments.
“If you tracked it through the various agreements in the deal, there could be defaults across the contractual structure,” Sideris said.
The damage to investors outside of Greece would be limited though.
About 14.06 billion of Greek securitization — consisting of deals backed by government-related assets (4.48 billion), small and medium company loans (4.63 billion), and consumer debt (4.95 billion) — is retained by Greek banks, according to Barclays most recent data. Other outstanding volumes include 2.23 billion of residential mortgage-backeds and 237.5 million of commercial mortgage backeds.
Total outstanding European securitization — both that retained by issuing banks and placed with investors — is about 1.8 trillion as of the end of Q1, according to data from the Securities Industry and Financial Markets Association (SIFMA).
One strength of Greek deals is that many of them have paid down significantly and so have relatively high overcollateralization, Mehta said. This would give a least the senior bonds some cushion against the sort of shock unleashed by a drachma-ization.
Argentina isn’t the only precedent for a Grexit’s impact on Greek securitization.
Nonconforming RMBS from the U.K. under the Eurosail series issued in 2007 were in trouble after Lehman Brothers' collapse in September 2008. The bank had provided cross-currency and interest-rate swaps to cover payments between the sterling-denominated loans and tranches that were in euros and dollars. When Lehman went under, the payments that the sterling borrowers were making had to be exchanged to foreign currency in the spot market, with no protections for possible shortfalls, which is precisely what happened as the sterling slid against the dollar.
At least two of the Eurosail deals were subsequently restructured to resolve the “broken swap” issue. Redenominating tranches into sterling was part of the change. That move triggered an upgrade on different tranches by Moody’s Investors Service, which had previously dunked some of them to borderline default because of the extreme currency risk.
Jitters over a Grexit are growing as the Greek government tries to renegotiate the terms of a 240-billion bailout from European creditors. The government already pushed back a June payment on debt owed the International Monetary Fund. Other large payments are due shortly on treasury bonds and the European Central Bank.
A failure to renew or restructure the bailout could force a Grexit. No country has every left the common currency.