Greek debt swap support close to 95%

Posted on March 8, 2012

Graffiti in Athens©AFP

Graffiti in Athens depicts the euro as a mechanical monster

The largest debt restructuring in history was heading for a successful outcome last night as Greece looked set to see a participation rate of close to 95 per cent for its €206bn bond exchange.

One person involved in the deal said that more than 90 per cent and possibly more than 95 per cent of investors had taken part, assuming collective action clauses (CACs) were used to bind dissenting holders of some bonds.

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“PSI is a success. Will it exceed 95 per cent? There is a good chance,” the person said. A Greek cabinet minister said: “It will be good news tonight.”

The Greek government will announce the official results of its two-week campaign to win over private holders of its debt early on Friday morning. But late on Thursday night bankers and senior Greek officials briefed in the results said an overwhelming majority of investors had voted in favour of the deal, which will see them suffer losses in net present value terms of about 75 per cent.

The high participation rate is only possible through the use of CACs, which will make the offer binding on all holders of Greek-law bonds. That in turn will almost certainly trigger pay-outs under credit default swap insurance.

Once the CACs are triggered, all €177bn worth of bonds issued under Greek law – or 86 per cent of all Greek debt in private sector hands – will be swapped for a cash payment equivalent to 15 per cent of their original holding. They will also be issued new Greek debt worth 31.5 per cent of their old bonds. The two measures will wipe about €100bn from Athens’ €350bn debt pile and will leave investors with 24 new securities.

“This extraordinarily difficult deal … allows Europe to avoid what could have been an enormously costly, disorderly default,” Charles Dallara, chief negotiator for Greek bondholders, said on Thursday during a visit to Brazil.

Greece said earlier this week that it would not pay any of the holdouts of its foreign law bonds, which together with some other bonds represent about 14 per cent of the total. People involved in the deal warned that despite the deal’s success there was still the possibility of lawsuits from hedge funds and other investors. “We don’t want to seem too victorious. Let’s remember Argentina suffered 10 years of litigation after its restructuring,” one said.

In another sign that a deal was imminent, the European Central Bank also began to reaccept Greek bonds as collateral from banks seeking cheap loans to run their day-to-day operations.

The ECB stopped accepting the bonds in liquidity operations after Standard & Poor’s last week declared Athens to be in “selective default”. Thursday’s successful debt restructuring freed up €35bn in eurozone funds to back Greek bonds, giving the central bank the comfort it needed.

Financial markets are already betting Greece will default again in the future. Grey market pricing for the new Greek bonds to be issued as part of the exchange ranged from 17 to 28 cents on the euro, a highly distressed level, according to indicative quotes seen by the FT.

The pricing equates to a yield on the new bonds of 17 to 21 per cent about where Greek yields stood in the autumn and far worse than the yield on debt issued by Portugal, which has also received a bailout.

According to a confidential analysis prepared for eurozone finance ministers last month, 95 per cent of all privately held Greek bonds must be included in the restructuring for Athens to lower its overall debt level to 120 per cent of economic output by 2020 – the target mandated by its new €130bn bailout.

Additional reporting by James Mackintosh in London, Joseph Leahy in Rio de Janeiro and Vivianne Rodrigues in New York

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