Greece Faces July Samurai Default Test as Deal Deadline Looms

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As Greece is given 48 hours to settle its fate, Tokyo may be the stage for the Mediterranean nation’s ultimate default.

A 20 billion yen ($162 million) Samurai note sold in 1995 falls due on July 14, and is the next bond needing repayment, according to data compiled by Bloomberg. European leaders gave Greek Prime Minister Alexis Tsipras’s government two days to clinch a deal after it submitted a set of proposals that began to converge with the terms demanded by creditors.

While Greece has about 1.5 billion euros ($1.7 billion) in payments due to the IMF by June 30, missing that payment wouldn’t necessarily trigger a default, according to Moody’s Investors Service. Forgoing the Samurai payment would because it is a marketable debt instrument.

“If the Samurai bond isn’t paid, it could cause a cross default on other public bonds,” said Ryosuke Kaneko, a credit analyst in Tokyo at Mizuho Securities Co., a unit of Japan’s third-biggest bank. If Greece can’t repay the IMF at the end of the month, then “market participants may start focusing on the Samurai bond as a trigger,” he said.

Greece’s package of proposals represents “a certain step forward, but it was also said very clearly that we’re not yet where we need to be,” German Chancellor Angela Merkel told reporters in Brussels after an emergency summit Monday night. A meeting of euro-area finance ministers is convened for Wednesday to prepare the ground for a second, scheduled summit of European Union leaders that begins the following day.

Default Risk

Standard & Poor’s said in a statement this month that without an agreement between Greece and its official creditors, the nation will likely default on commercial debt within 12 months. On June 10, the company lowered its rating on Greece by one level to CCC, eight levels below investment grade, after the nation delayed a payment to the IMF to the end of June.

The Samurai market’s average yield spread is one basis point above an eight-year low as the Bank of Japan pushes ahead with unprecedented stimulus.

Mizuho Bank Ltd., which is serving as the agent for bond payments, is carefully watching developments in Greece, Masako Shiono, a spokeswoman for Mizuho Financial Group Inc., said by phone.

Greek government spokesman Gabriel Sakellaridis told reporters in Athens last month the nation wants to continue to service all its obligations within and outside of country.

The risk from Greece to Japanese banks is “extremely small” and probably won’t directly affect the nation’s financial system, Yasuhiro Sato, the chairman of Japanese Bankers Association, said at briefing in Tokyo last week.

Greece Impact

The direct impact of a Samurai default by Greece would likely be limited, according to Mizuho’s Kaneko. Yen notes sold by foreign issuers had an average spread of 27 basis points more than swaps, Bank of America Merrill Lynch data show.

Issuers have failed to repay Samurai debt in the past. Lehman Brothers Holdings Inc. defaulted on the securities in 2008, as did Argentina in 2002.

European banks have come to dominate the Samurai bond market since the waning of the euro-area debt crisis. Four European banks including Credit Agricole SA sold riskier subordinated notes in Japan since December.

Greece’s total public debt stood at 313 billion euros on March 31, with the euro area’s original crisis-fighting fund owed about 131 billion euros, the biggest single creditor. Greece also has several other yen bonds maturing next year.

No Extension

IMF chief Christine Lagarde said earlier this month Greece won’t be given a grace period if it fails to make a payment at the end of the month. Talks between Greece and its creditors -- the IMF, European Central Bank, and European Commission -- have dragged on without any results.

Greece needs to service marketable debt including 3.5 billion euros due on bonds held by the ECB on July 20 and 3.2 billion euros a month later, Moody’s said in an April report. Because of their larger size, those notes received more attention than the Samurai debt, according to Mizuho’s Kaneko.

“If Greece stops payments to the IMF and ECB, it may not be allowed” to pay the Samurai bond, said Mana Nakazora, the chief credit analyst in Tokyo at BNP Paribas SA. “The IMF or ECB could seek an injunction to stop the payment.”

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