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Greek Debt Swap at 95% After Bondholders Forced to Join

Greek Debt Swap at 95% After Bondholders Forced to Join
Evangelos Venizelos, Greece's finance minister, at a news conference in Athens on March 9, 2012. Photographer: Kostas Tsironis/Bloomberg

Greece pushed through the biggest sovereign restructuring in history after getting private investors to forgive more than 100 billion euros ($132 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that with the swap Greece had met the terms for a 130 billion-euro rescue package designed to prevent a collapse of the economy. Ministers freed up 35.5 billion euros in payments and interest for bondholders, with a decision on the balance of the bailout funds to be made at a March 12 meeting in Brussels.

“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”

Stocks rose while the euro fell after the government in Athens said it will trigger an option forcing some investors to take part in the exchange. Officials from the International Swaps and Derivatives Association called a meeting today to consider a “potential credit event” relating to Greece, while Fitch Ratings cut the nation’s long-term foreign and local currency issuer default ratings to “Restricted Default.”

Participation Rate

Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said. Bondholders tendered 152 billion euros of Greek-law bonds, or 85.8 percent, and 20 billion euros of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.

The result was “very strong and positive,” said Josef Ackermann, chairman of the Washington-based Institute of International Finance, which led negotiations with the Greek government on behalf of private bondholders. “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.”

The goal of the exchange was to reduce the 206 billion euros of privately-held Greek debt by 53.5 percent. The swap dwarfs Argentina’s 2005 restructuring, previously the largest, when that nation sought to exchange $81.8 billion of sovereign debt.

CDS Contracts

Even with the restructuring almost completed, Greece faces hurdles. Europe’s most indebted nation will be saddled with borrowings equivalent to 120.5 percent of gross domestic product by 2020 under current targets. The Greek government must continue to meet the terms laid down by its international creditors to receive aid payments at three-monthly intervals. Elections in April or May might still upend adherence to the measures demanded.

Greek GDP was 7.5 percent lower in the fourth quarter than a year earlier, the Hellenic Statistical Authority said today. The economy is mired in a fifth year of recession.

Greek Finance Minister Evangelos Venizelos said that participation “surpassed expectations” and the Cabinet approved plans to activate the collective action clauses that had been retroactively added to the bonds. Forcing bondholders to participate may trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.

“This is a dangerous precedent,” John Wraith, fixed-income strategist at Bank of America Merrill Lynch, said in an interview on Bloomberg Television. For Greece, “yes, it is probably necessary, but it is just another hurdle crossed rather than some sort of solution.”

‘Sanctity Lessened’

The euro weakened for the first time in three days, dropping 1.3 percent to $1.3105 as of 6:07 p.m. in Berlin. The Stoxx Europe 600 Index gained 0.5 percent to 265.44.

For bond investors, “the rules have been changed here,” Bill Gross, co-chief investment officer of Pacific Investment Management Co., said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The sanctity of their contracts is certainly lessened. Bondholders have that to look forward to going into the future.”

The writedown is a key element in European leaders’ efforts to turn the tide against the crisis that first emerged in Greece in late 2009, then forced Ireland and Portugal to follow Greece in requiring bailouts.

Germany and France, Europe’s two biggest economies that have steered the euro-area’s response to the crisis, welcomed the debt-swap take-up. The swap was a “great success” and “good news,” and “hits all the objectives we set ourselves,” French Finance Minister Francois Baroin said on RTL Radio.

Merkel ‘Pleased’

Chancellor Angela Merkel is “pleased” about the “high level of participation of private creditors,” Steffen Seibert, her chief spokesman, said in Berlin. It is “an encouraging result that will help put Greece on a path to stability. What’s important now is for Greece to seize the opportunity offered by this debt swap, meaning it implements the agreed programs.”

Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas SA and Commerzbank AG, had said they would agree to the offer before it closed yesterday at 10 p.m. Athens time.

In the exchange, investors will receive new bonds with a face value of 31.5 percent of the old ones together with notes from the European Financial Stability Facility. The new debt is governed by English law and comes with warrants that will provide extra income in years when Greek economic growth exceeds thresholds. The net present value loss for investors is more than 70 percent.

“Despite all the justified happiness about this issue we have to note that Greece is only buying time,” Michael Kemmer, general manager of the BdB Association of German banks, said in an interview with Deutschlandfunk radio. “This is an important step -- the private sector showed solidarity. That’s good, but the work has only just begun.”

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