German Banks, Insurers Likely to Take Part in Greek Debt Swap

Germany’s biggest banks and insurers said they plan to take part in the Greek debt swap as the southern European country tries to avoid a disorderly default.

Fourteen German firms holding more than 19 billion euros ($25 billion) of Greek government bonds will take part in the exchange. Deutsche Bank (DBK) AG and Commerzbank AG, the country’s biggest lenders, committed on March 5, while Allianz SE, Munich Re, DZ Bank AG and KfW Group also said they will join. Another eight financial firms will participate, according to people with knowledge of the plans who declined to be identified.

Private creditors reached an agreement with Greek and European officials last month on the biggest sovereign-debt restructuring in history. The goal of the exchange, which runs through March 8, is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent, helping avert a default that could roil markets and fuel contagion.

“What we are currently seeing is something like the final stage of a poker game,” said Klaus Fleischer, a professor of banking and finance at the University of Applied Sciences in Munich. “In the end, the private sector will give in to prevent a disorderly default as there simply is too much at stake.”

The Greek government, which set a 75 percent participation rate as a threshold for proceeding with the transaction, said it will use collective action clauses to force holders of Greek-law bonds to accept the swap if it receives sufficient consent from investors. A disorderly Greek default may cost the world more than 1 trillion euros, according to a memo from the Institute of International Finance, a banking group that led the swap negotiations. The memo was posted on the Athens News website.

‘Positive Signal’

The 43-company Bloomberg Europe Banks and Financial Services Index rose 1.1 percent to 83.51 as of 11:41 a.m. in Frankfurt. The index yesterday posted its biggest decline in four months as concern grew Greece may fail to garner sufficient participation in the debt swap.

The restructuring of Greece’s debt “will play a key role in stabilizing the euro zone,” said Michael Diekmann, chief executive officer of Allianz, which has Greek sovereign debt with a nominal value of 1.3 billion euros. “A broad-based acceptance of the debt restructuring proposal is a positive signal for Greece and the capital markets.”

German lenders have the largest amount of total claims on the Greek public sector, followed by French banks, according to data from the Bank for International Settlements as of September 2011. DZ Bank AG, the country’s biggest cooperative lender, Munich Re, the world’s largest reinsurer, and Germany’s state- owned development bank KfW said separately today they will participate in the swap.

Biggest Contributor

Some of the German financial firms haven’t yet officially signed off on the exchange and the final number may vary as holdings may have changed because of bond sales or maturities.

Germany, as Europe’s largest economy, has been the biggest country contributor to euro-area bailouts during the sovereign debt crisis. Chancellor Angela Merkel has led Europe’s response to the crisis now in its third year. She won the support of 25 of the European Union’s 27 members at last week’s EU summit for her fiscal pact enforcing tighter debt and deficit limits in a bid to tackle the root causes of the turmoil.

European officials are pressing investors to swallow net present value losses of more than 70 percent to avert the even greater hit that would result from an uncontrolled default. A second rescue package, a 130 billion-euro bailout, depends on the success of the debt swap, which is being called voluntary.

Compelling Holdouts

Retail investors in Greek government bonds should reject a voluntary swap offer aimed at reducing the country’s debt load, German private investor lobby group DSW said on March 5. Patrick Armstrong, managing partner at Armstrong Investment Managers in London, said in a Bloomberg Television interview today that he also wouldn’t participate voluntarily, saying “there is no real incentive.”

Commerzbank (CBK) Chief Executive Officer Martin Blessing likened the voluntary nature of the Greek debt swap to confessions extracted by the Spanish Inquisition. Still, Germany’s second- biggest lender plans to participate, he said.

Greece expects bondholders to accept the offer and is ready to force them to participate if necessary, Finance Minister Evangelos Venizelos said in a Bloomberg Television interview in Athens this week. Compelling holdouts to take part in the swap will likely trigger insurance contracts on the debt known as credit default swaps, analysts said.

Net notional credit default swaps on Greek government bonds total $3.2 billion while the gross notional amount of CDS is more than $69 billion, according to Bloomberg data based on the DTCC.

Too Complacent

“People are being too complacent about Greek credit default swaps,” said Neil Dwane, chief investment officer for Europe at Allianz Global Investors, which helps manage about 300 billion euros globally. “The focus is on the net exposure, but if there’s one thing the financial crisis showed us, we should be looking at gross CDS exposure.”

Twelve members of the creditors’ steering committee that negotiated the debt swap with Greece will join in the exchange, according to a March 5 statement from the International Institute of Finance, which represents more than 450 financial- services companies globally. Charles Dallara, managing director of the Washington, D.C.-based IIF, led negotiations for private creditors in the debt-swap discussions.

Those firms, which include BNP Paribas SA (BNP), Deutsche Bank and Commerzbank, hold Greek government bonds with a face value of at least 40 billion euros, according to data compiled by Bloomberg from the companies and their reports.

Allianz, Axa SA (CS), CNP Assurances (CNP) SA, EFG Eurobank Ergasias SA (EUROB), Greylock Capital Management, ING Bank (INGA) and Intesa Sanpaolo SpA (ISP), National Bank (ETE) of Greece and Alpha Bank are the other members of the creditors’ steering committee that plan to accept the swap, according to the statement from the IIF.

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Oliver Suess at osuess@bloomberg.net; Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net

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