Europe’s largest lenders and insurers are likely to accede to the Greek debt swap because they’ve already written down their sovereign holdings and want to avert the risk of a default, analysts said.
BNP Paribas SA (BNP), Deutsche Bank AG (DBK) and Axa SA (CS) have all written down Greek government bonds by more than 70 percent, according to data compiled by Bloomberg. This may limit losses after private creditors and Greece overnight agreed to a deal that could trigger a 74 percent loss in the securities' net present value, according to estimates from Guillaume Tiberghien, a London-based analyst at Exane BNP Paribas.
“European banks have had a long time to prepare and many already have the losses behind them,” said Dirk Becker, a Frankfurt-based analyst at Kepler Capital Markets. “In the end, this deal was negotiated by the biggest banks and insurers, so a large participation rate is assured.”
The biggest sovereign restructuring in history averts a default that Deutsche Bank Chief Executive Officer Josef Ackermann has said could have triggered a “meltdown” far worse than the aftermath of Lehman Brothers Holdings Inc.’s 2008 collapse. The success of the swap depends on how many investors participate in the transaction.
“The acceptance rate will be 90 percent for sure; we will see if it hits 95 percent,” Hans Humes, president of hedge fund Greylock Capital Management and a member of the Institute of International Finance’s steering committee that negotiated the swap, said in an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.” “Given the circumstances, the private-sector bondholders should be reluctantly accepting.”
Under the deal, investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. The plan seeks to reduce Greece’s debt burden by 107 billion euros ($169 billion), about half the country’s estimated gross domestic product for 2011, the IIF said.
Bondholders will exchange 31.5 percent of their principal into 20 new Greek government bonds with maturities of 11 to 30 years and the rest into short-dated notes issued by the EFSF. The coupon on the new bonds was set at 2 percent until February 2015, 3 percent for the following five years and 4.3 percent until 2042.
Collective Action Clauses
Greece’s government said it will introduce legislation to parliament for so-called collective action clauses that will allow it to enforce losses on bondholders refusing to take up the offer. The government would need support from the owners of 50 percent of the bonds to force the rest to accept, said Pierre Flabbee, a Paris-based analyst at Kepler Capital Markets.
The new bonds will be subject to English law, meaning further changes to the securities can only be made by agreement with bondholders, said Rodrigo Olivares-Caminal, who teaches banking and financial law at Queen Mary, University of London.
“It’s a good protection for bondholders,” he said. “But Greece is in a worse position because it will not be able to change the rules of the game on an ongoing basis.”
The BdB Association of German Banks said it expects a high participation rate after lenders had time to prepare for the restructuring. The VOeB association of German public banks said the private sector’s involvement must be an “isolated case” in order not to jeopardize investors’ confidence in sovereign debt.
“These three-month negotiations would be good-for-nothing if then the banks say no,” said Kepler’s Flabbee. “When provisions are taken, it’s an implicit approval for the plan.”
The IIF and European officials initially agreed to a 50 percent writedown at an October summit in Brussels. Greece’s worsening economy put the debt-cutting target in doubt and forced bondholders to accept bigger losses. At the start of talks in November, creditors wanted an 8 percent coupon on the new securities, a person with knowledge of the discussions said. Today’s agreement foresees a weighted average coupon of 3.65 percent over the full 30-year period, the IIF said.
The IIF’s steering committee that negotiated the swap included representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas, Commerzbank AG, Deutsche Bank, Intesa Sanpaolo SpA, ING Groep NV (INGA), Allianz SE (ALV) and Axa.
The 32 members of the IIF’s larger creditors’ committee have already taken at least 24 billion euros in combined writedowns on the country’s sovereign debt, and have at least 44 billion euros in residual holdings, according to data compiled by Bloomberg from their most recent reports.
BNP, Societe Generale
“BNP Paribas and Societe Generale (GLE) have provisioned enough,” said Tiberghien at Exane BNP Paribas. “They have every interest in participating” in the swap offer.
Hedge funds holding Greek bonds may still resist the deal and seek to get paid in full, either by the Greek government or by triggering payouts from insurance contracts known as credit- default swaps. Investors in Greek debt that are hedged with credit-default swaps would be paid the face value of their holdings in exchange for the underlying securities or the cash equivalent if the insurance contracts are triggered.
A trigger would be avoided if Greece and its creditors reach a voluntary agreement, or one that’s not binding on all holders, while use of a collective-action clause to impose losses on investors holding out against the exchange could trigger the contracts, according to rules of the International Swaps & Derivatives Association.
Credit-default swaps cover a net $3.2 billion of Greek debt, less than 1 percent of the country’s bonds outstanding.
“A voluntary deal is the worst option for the hedge funds,” said Kepler’s Becker. Such investors want to be repaid in full by the borrower or a triggering of the CDS, he said.
Greece’s four largest banks are the country’s biggest private creditors, with almost 29 billion euros of holdings of government bonds. They have so far recorded combined losses of only 4.3 billion euros on the bonds, according to their most recent disclosures. The banks will receive a capital injection as part of the bailout, allowing them to recognize more losses.
The biggest incentive of all for banks to help bail out Greece is a possible repeat of the Lehman Brothers collapse, which sparked the biggest financial crisis since the Great Depression and led to losses of more than $2 trillion and taxpayer bailouts from London to Berlin to Washington, analysts said.
“The fear is that the collapse of Greece might trigger the collapse or a run on a couple of banks,” said Olivares-Caminal. “They are buying time to be able to recapitalize the banks and ring-fence Greece from the rest of Europe.”