Bank participation in voluntary writedowns on Greek bond holdings will be “very high” and the exchange is unlikely to trigger debt insurance contracts, said Charles Dallara, managing director of the Institute of International Finance.
The IIF, which represents financial companies, agreed to a plan for private investors to accept a 50 percent cut in the face value of Greek sovereign bond holdings as part of broader European Union measures to end the region’s debt crisis. Dallara said many details of the deal will be decided in coming weeks, including the net-present-value impact on banks’ books.
“We didn’t agree on a participation rate and it is not the appropriate time for us to put a specific rate on that,” Dallara, 63, said at a briefing with journalists in Brussels today. “But it is likely to be very, very high.”
Dallara also said he was confident that the final agreement on private participation won’t have a large effect on the net present value of the eligible debt. The reductions will be of “clearly manageable proportions,” he said.
European leaders negotiated the debt deal during 10 hours of talks on how to fight the sovereign crisis and protect the 17-nation euro area. The summit, which ended earlier today, boosted the capacity of the euro area’s rescue fund to 1 trillion euros ($1.4 trillion) and laid out a plan to recapitalize banks and provide further aid to Greece.
The debt swap, designed so that investors will take on a bigger share of Greece’s rescue costs, involves “a nominal reduction in the value of Greek debt, all Greek government debt held by private citizens,” Dallara said in an interview today on Bloomberg Television’s “The Pulse.”
There will also be 30 billion euros in official funding to collateralize the new bonds with AAA-rated zero-coupon securities. Issuing options for the collateral, such as using the newly expanded European Financial Stability Facility, are still being weighed, said Hung Tran, the IIF’s deputy managing director, to reporters in Brussels. The new Greek government bonds will be governed by English law, Dallara said.
Greek bonds soared and the euro strengthened after the deal was announced. The yield on the 10-year note dropped to 24.16 percent as of 10:10 a.m. in London, from 25.32 percent yesterday and compared with 12.5 percent at the end of last year. The euro gained to a 1 1/2-month high of $1.3998 from $1.3906 the day before, adding to its 4.6 percent advance this year.
The last-minute agreement was reached after banks, the biggest private holders of Greece’s government bonds, were threatened with a costly full default, according to Luxembourg Prime Minister Jean-Claude Juncker. The deal allows the EU and the banking group to portray it as a voluntary bond exchange rather than a broad-based default that would trigger debt insurance contracts.
The International Swaps & Derivatives Association will decide if the credit-default swaps should pay out depending on whether it judges losses to be voluntary or compulsory. The agreement appears to be voluntary, said David Geen, the group’s general counsel, meaning $3.7 billion of debt-insurance contracts won’t be triggered, according to ISDA’s rules. Geen was speaking on Bloomberg TV’s “InsideTrack” today.
Dallara said Greece will pass through a short period of “technical default” in the final stages of a newly agreed bond exchange, which “should last no more than a matter of weeks, maybe only days.” This has been expected and isn’t reason for concern, he said, especially given the consequences of other approaches.
“An involuntary approach could’ve triggered true calamity for Greece, Europe and the global economy,” Dallara said.
The accord seeks to reduce Greece’s debt to 120 percent of gross domestic product in 2020, from the 162 percent forecast for this year. Greek Prime Minister George Papandreou will deliver an address at 8 p.m. in Athens to outline the summit’s ramifications for his country.
Josef Ackermann, the chief executive officer of Deutsche Bank AG and the IIF’s chairman, said he gave his full support to EU policy makers’ deal on Greek debt.
“We are very pleased with the agreement reached,” he said in a statement released by the IIF today. “The outcome is a good one for Greece, Europe and the investors, and we look forward to its early implementation.”