The deadline for private investors accepting a haircut of their Greek holdings is tonight. If a sufficient number of investors approve the deal, which involves losing up to 75% of their investment, Greece will then enforce what is called Collective Action Clauses (CAC) – essentially forcing the investors reneging of the deal to accept the same terms.
The CAC are terms Greece and many other bond issuers insert in their prospectus at the time of offering. It is a contract point.
If not enough private investors agree on the Private Sector Involvement agreement (PSI), – the haircut – then Greece would not be able to apply the CAC and a disorganized default would take place, at worse terms for investors.
A disorganized default could cost over €1 trillion and send shock waves throughout the world economy.
Private institutional investors own about 41% of the €206 billion Greece owns to private investors. That includes banks, insurance companies, pension systems, hedge and mutual funds, etc.
Some Investors who own Credit Default Swaps (CDS) – a sort of insurance policy against default – may be reluctant to accept the haircut offered by Greece.
The Lessons for New Jersey: Unlike Greece, New Jersey can not officially default but can default de facto – as a matter of fact – by missing payments on its outstanding debt. All the current proposals for tax reduction or tax credits made by both the Governor and the Legislature lack solid fiscal footing, are based on wishful thinking, and are too small to have the intended economic effect – if there was any intention other than a political stunt preparing for the 2013 election.
I like tax cuts like everyone else but not when I will have to pay back the money with interest in a few years or my sons will have to if New Jersey’s liquidity outlives me. The current proposals are nothing but irresponsible.
The New Jersey Government, both sides of the aisle, are placing New Jersey on the same path Greece followed, exactly for the same reasons Greek politicians did: To perpetuate themselves in power.