The European Union faces a first test in its attempt to turn the page on the two-year debt crisis when Greece’s private creditors decide this week whether to sign off on the biggest sovereign-debt restructuring in history.
The success of the 106 billion-euro ($140 billion) debt swap, confirmed on the eve of last week’s European Union summit, depends on how many investors agree to the writedown by the March 8 deadline. Euro-area finance ministers will hold a teleconference on March 9 to review the deal’s outcome.
“The European crisis is not quite over yet,” Erik Nielsen, chief global economist at UniCredit SpA in London, wrote in a note to clients yesterday. He said enough creditors will probably participate in the writedown to avoid triggering so-called collective action clauses, which could be used by Greece to compel investors to participate and roil markets by triggering credit-default swap insurance contracts.
The Greek government has set a 75 percent participation rate as a threshold for proceeding with the transaction, in which 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. Euro-area finance ministers last week authorized the EFSF to issue bonds for the swap.
Germany’s DSW investor protection group advised private sector bondholders to reject the Greek bond offer, according to an e-mailed statement today.
Leaders of the EU last week said their focus will shift away from budget-cutting to growth measures after completing the details of a second Greek bailout package. Whether that 130 billion-euro package can proceed will depend on the outcome of this week’s swap.
Italian and Spanish 10-year bonds climbed last week, with Italy’s bonds showing the longest run of gains in 14 years, buoyed by a second round of three-year loans offered by the European Central Bank. Stocks fell today after China announced its lowest economic growth target since 2004 and European services and manufacturing output was revised lower.
The Euro Stoxx 50 Index fell 0.4 percent as of 4:05 p.m. Frankfurt time. The euro broke a three-day decline, adding 0.2 percent to $1.3223.
“We’re in calmer waters,” EU President Herman Van Rompuy said in an interview on Dutch television’s “Buitenhof” program yesterday.
EU leaders have called Greece’s case unique while vowing to keep the country where the debt crisis originated in the monetary union.
“If you have a sick child in the family, you don’t abandon it, but work on a remedy,” Austrian Finance Minister Maria Fekter said in a March 3 radio interview with state broadcaster ORF. “That’s what we’re currently trying to do with Greece.”
The Institute of International Finance, which represented private creditors in the negotiations over Greece’s debt swap, yesterday endorsed the final terms of the deal and left it up to its members to choose whether to take part.
The plan, which private creditors reached an agreement on with Greek and European officials last week, seeks to reduce Greece’s debt to 120.5 percent of gross domestic product by 2020.
“These are important steps towards resolving the Greek debt crisis, addressing the overall fiscal and sovereign debt problems in the euro area, and restoring financial stability, which is essential to foster economic growth and job creation,” the IIF said in an e-mailed statement.
Luxembourg Prime Minister Jean-Claude Juncker baffled his EU colleagues on March 1 by saying the bloc has a backup “plan B” if the Greek debt swap fails.
“I have nothing to say about this odd declaration,” French President Nicolas Sarkozy said in Brussels the next day. Finnish Prime Minister Jyrki Katainen said there’s “no plan B. We have chosen the way how to deal with the crisis.”
Danish Prime Minister Helle Thorning-Schmidt told reporters today that “everyone knows that we’re not completely finished in terms of the Greek situation, but we’ve taken substantial steps.”