“This is a move toward reality for the markets, for investors, for Greece and for Europe,” Dallara said in an interview in Brussels yesterday. “That acceptance of reality is the first step toward moving to a brighter future.”
Greece’s rescue package won’t be derailed by a probable period of temporary default as investors exchange existing bonds for longer-term securities with more favorable terms, Dallara said. The Washington-based IIF, which represents more than 400 financial institutions, pledged that its members and other banks would participate in the program.
“I don’t think the selective default is a moment of any major consequence,” Dallara said. “Selective default is a temporary period that you pass through on your way to a better position.”
The banks’ participation will provide financing of 54 billion euros ($77.6 billion) to Greece from mid-2011 to mid- 2014, building to a total of 135 billion euros through the end of 2020, according to the IIF’s estimates. The target investor participation rate is 90 percent, and, as a result of the program, the average maturity of privately held Greek debt will extend from six years to 11 years, the group said.
Dallara said the package shows that Greece is in a different situation than other euro-area countries like Portugal that are struggling to repair their economic and fiscal foundations. The rescue plan will give the markets breathing room to evaluate nations on an individual basis, he said.
“This demonstration by the leaders of Europe that they can actually come to grips with an exceptionally unique and complex sovereign debt situation should actually ease the contagion in the markets with regard to other sovereigns,” Dallara said.
As part of yesterday’s talks, the European Central Bank removed an obstacle to a new bailout after Jean-Claude Trichet softened his opposition to a default which may be declared by credit rating companies if the debt swap occurs. The ECB had until now said the euro region’s first sovereign default could spark a bout of financial turmoil, clashing with German Chancellor Angela Merkel’s position that a default could be inevitable.
Trichet signaled governments will guarantee any defaulted Greek debt offered as collateral during money market operations. That may enable Greek banks to keep tapping the ECB for emergency funds. Officials said the aim would be to limit any credit event to a few days.
The ECB “understands that it has a crucial responsibility to underpin financial stability,” Dallara said. “It is entirely appropriate and necessary, I would say, that they look to the governments of Europe to shoulder their responsibilities.”
Participating investors would see on average a 21 percent reduction in the net present value of their existing Greek bonds, the IIF estimates. Dallara said the effects on bank profits, balance sheets and capital structure will be handled on an institution-by-institution basis.
Private investors will have the option to exchange existing Greek debt into four instruments. Three will be fully collateralized by AAA-rated zero-coupon securities and have a 30-year maturity, and the fourth will be for 15 years and partially collateralized by funds held in an escrow account.
Menu of Options
The first option would be to swap existing securities into a 30-year bond at par value backed by top-rated debt purchased by the European Financial Stability Facility. The coupon would start at 4 percent and climb to 5 percent over the life of the bond, and the principal would be repaid to investors with the proceeds of the maturing zero-coupon securities.
In the second choice, investors would roll over their holdings into 30-year debt at par when the existing bonds mature, with the same collateral and interest rates as the first option. The other two options involve a “discount bond exchange” into 15- or 30-year securities, at 80 percent of par value. Coupons would be higher to reflect the haircut investors would accept on the value of the bond.
The IIF assumes that an equal portion of investors will participate in each option.
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