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Irish Finance Minister Causes Draghi's Worst Nightmare

Big problem for ECB: Irish finance minister says if ECB offers discount on Greek bonds, that will strengthen Ireland's effort for concessions. This is Draghi's worst nightmare: one comes knocking, and they all come knocking.

Meantime, Greek politicians are meeting to sign off on the Greek bailout package. What if they reject the strict oversight that is a condition of the bailout package? Greece would not be able to meet the 14.5 billion euro debt payment due on March 20 and would be in default.

Would a default necessarily mean that Greece would leave the euro? No, but that might make the most sense. Think about it: in the event of a default, the Greek banks — as well as the Greek central bank — would presumably have significant losses. The banks will need to be recapitalized. If they leave the euro, they can print their own money recapitalize and reflate the economy. If they stay in the euro that would be more difficult.

Of course, a default on March 20 doesn't mean they will default on future redemptions: a deal could be reached even if Greece defaults on that particular payment.

I hate to bring this up, but: along with approval of the bailout package, the Greek parliament will likely force the participation of all debtholders in the PSI by inserting a retroactive collective action clause (CAC) that would make all debtholders participants to the agreement, whether they signed on or not.

Isn't activating a CAC a "credit event" that should trigger the credit default swaps for Greek debt? The International Swaps and Derivatives Association (ISDN) will rule on that, but it seems like it should.

Of course, if a vast majority of bond holders vote to participate in the PSI, then activating a CAC will not be necessary.

My head hurts.

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