Greek Debt Swap May Cut Debt By 27 Billion Euros, IIF Says
Greece’s debt may fall by 27 billion euros ($37 billion) this year, or 12 percent of the country’s gross domestic product, after a proposed bond swap and buyback, the Institute of International Finance said.
The debt swap is part of a broader rescue package agreed to by European authorities on July 21, which also includes 109 billion euros in public money and an expanded scope for the European Union’s rescue fund. The private-sector part of the rescue package will provide 300 billion euros in cash flow savings through 2020, said the IIF, a trade association.
Those savings and lower debt “would translate into a significantly improved outlook for debt sustainability,” IIF said in a research note released late yesterday. “The massive reduction in financing needs should have important positive effects.”
Greece’s two-year bonds currently yield almost 70 percent and credit default swaps indicate more than a 90 percent chance the country won’t be able to pay back a debt of more than 350 billion euros. Portugal and Ireland followed Greece is seeking bailouts and bond yields in Spain and Italy surged to euro-era records last month as contagion from the debt crisis spread.
IIF said there are “encouraging indications of strong participations” in the debt exchange, a voluntary effort that aims for a 90 percent takeup rate. Greece and the IIF are in the midst of informational meetings with investors that will continue through the end of September.
Record Debt
The European Commission forecast in May that Greece’s debt would rise to almost 158 percent of GDP this year and 166 percent next year. Greece ended last year with a debt of 143 percent, already the highest of any nation in the euro area’s history.
The IIF plan offers investors four options for exchanging their Greek debt holdings into new bonds with a longer maturity, lower interest rates and “credit enhancements” of AAA zero- coupon long-term bonds. European authorities will finance the credit enhancements, which will be acquired by Greece, and they are expected to amount to 41 billion euros, the trade group said.
Alongside the debt swap, the Greek rescue plan includes a debt buyback, initially financed with 20 billion euros from countries in the euro region. IIF said it’s exploring options for an expanded buyback, using financing from non-European governments and the International Monetary Fund.
In the short term, Greece needs to follow through on a set of fiscal measures designed to address “fiscal slippages” in 2011, IIF said. These slippages are a result of a weaker-than- expected economy, shortfalls in tax collection, and a delay in implementing a reduction in interest rates on euro-area loans to Greece.
IIF is a Washington-based trade group whose members include more than 450 financial institutions around the world.
To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net;
To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net;
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