Greece Readies Record Debt Swap
Greece moved closer to sealing the biggest sovereign restructuring in history as investors indicated they’ll participate in the nation’s debt swap.
Holders of about 60 percent of the Greek bonds eligible for the deal, including Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas (BNP) SA and Commerzbank AG (CBK), have agreed to the offer so far. That brings the total to about 124 billion euros ($163 billion), based on data compiled by Bloomberg from company reports and government statements.
The euro and stocks gained on speculation Greece was on the verge of reaching its participation target by the deadline of 10 p.m. in Athens today. The goal of the exchange is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent and turn the tide against the debt crisis that has roiled Europe for more than two years.
“A historic process will be completed tonight,” Greek Finance Minister Evangelos Venizelos told Parliament in Athens today. “If all goes well, tomorrow we can announce that we are relieving Greeks of 105 billion euros of debt.”
While Greece would prefer a voluntary deal, the government has said it will use collective action clauses to force holders of Greek-law bonds into the swap if the so-called private sector involvement falls short and it gets sufficient approval from investors to change the bonds’ terms.
No Big Surprise
The swap “will go through” and markets won’t be jarred should a majority fall short of the targeted amount, Peter Bofinger, an economic adviser to the German government, said in an interview from Berlin today with Bloomberg Television.
“The markets are aware of the risk that a majority for voluntary restructuring is not available,” Bofinger said. “So I think the surprise won’t be too big if tonight when they realize the collective action clauses will have to be applied.”
Under the rules of the exchange, investors holding at least 50 percent of the eligible bonds must vote on the swap, and 66 percent of those must agree to amend the bonds to enable the government to impose the collective action clauses, said Christoph Rieger, Commerzbank’s head of fixed-income strategy.
“Adding up the commitments to participate in the Greek PSI, it is now clear that the CAC hurdles will very likely be cleared,” Reiger said.
The 17-nation euro rose for a second day against the dollar, gaining 0.65 percent to $1.3235 as of 4:06 p.m. in Berlin. The Stoxx Europe 600 Index (SXXP) gained 0.9 percent.
“The fact is the markets had a very long time to be prepared for this,” Janet Henry, chief European economist at HSBC Holdings Plc, said in a Bloomberg Television interview. “There’s a lot more optimism in markets relative to where we were at the end of last year.” She cited the “breathing space” provided by the European Central Bank’s liquidity offer for banks.
In Frankfurt, ECB President Mario Draghi said it would be “completely inappropriate” to comment on the Greek debt swap since “the operation is unfolding.”
The Greek government has said it wants participation above 90 percent and is seeking a minimum level of 75 percent, including with use of the collective action clauses. Greece expects holders to accept the offer and is ready to force them if necessary, Venizelos said in an interview earlier this week.
Hans Humes, president of Greylock Capital Management, expects holders of more than 80 percent of Greece’s government bonds to accede to the swap, he said in a Bloomberg Television interview yesterday. Humes is a member of a committee of private bondholders that negotiated the deal with the government.
Niek Hoek, chief executive officer of Amsterdam-based Delta Lloyd NV, said today the insurer plans to take part in the swap deal on condition that the CAC clause applies to all parties.
“We have indicated we will participate if everyone else does,” he told reporters on a call. “Our base case expectation is the clause will be declared applicable and that the debt will be restructured in that fashion.”
Greece’s six largest banks, cumulatively the biggest private holders of the country’s debt, plan to accept the offer, the Finance Ministry said March 6. Greek pension funds with about 17 billion euros of bonds will also join, Finance Minister Evangelos Venizelos said on Real FM Radio yesterday.
More than thirty banks and insurers that were on the private creditor-investor committee for Greece plan to accept the swap, according to an e-mailed statement from the Institute of International Finance yesterday. Those investors hold an aggregate 84 billion euros of bonds, said the Washington-based IIF, which represents more than 450 financial firms globally.
Some investors are probably still evaluating Greece’s offer, Charles Dallara, the IIF’s managing director, told reporters in Rio de Janeiro today. Investors should believe the Greek government when it says this is the final offer, he said. He reiterated that he expects a high level of participation, without giving a specific number.
Investors who participate will get new bonds with a face value of less than half the previous securities, longer maturities and reduced interest rates, leading to a net present value loss of more than 70 percent. The new bonds do come with warrants that will provide extra income in years when Greek economic growth exceeds certain thresholds.
The amount of the country’s bonds issued under other than Greek law totals 29 billion euros, or 14 percent of the amount eligible for the swap, Frankfurt-based KfW said, citing the swap invitation memorandum. Those bonds are governed by different rules and wouldn’t be subject to the collective action clauses that were retroactively added to the Greek-law securities.
“I do fully expect to be part of the collective action clause,” Patrick Armstrong, managing partner at Armstrong Investment Managers in London, said yesterday in a Bloomberg Television interview. He said he wouldn’t voluntarily join in the swap because of the “minuscule” chance his bond maturing March 20 will be redeemed at face value.
Compelling holdouts to take part will likely trigger insurance contracts on the debt known as credit default swaps.
“I can’t see any scenario where people are forced to participate against their will and they aren’t triggered,” Armstrong said.
The members of the IIF creditor-investor committee who agreed to participate are Ageas, Allianz SE, Alpha Bank SA, Axa SA (CS), La Banque Postale, Banco Bilbao Vizcaya Argentaria SA, Bank of Cyprus, BNP Paribas, CNP Assurances SA, Commerzbank AG (CBK), Credit Agricole SA, Credit Foncier, DekaBank Deutsche Girozentrale, Deutsche Bank AG (DBK), Dexia SA, Emporiki Bank of Greece SA, EFG Eurobank, Generali, Greylock, Groupama SA, HSBC Holdings Plc, ING Bank, Intesa Sanpaolo SpA (ISP), KBC Groep NV, Landesbank Baden-Wuerttemberg, Marfin Popular Bank Plc, Metlife Inc., National Bank of Greece SA (ETE), Piraeus Bank SA, Royal Bank of Scotland Group Plc, Societe Generale SA and UniCredit SpA.
In Germany, Munich Re, DZ Bank AG and KfW Group also said they will take part in the exchange. FMS Wertmanagement, the bad bank created to prevent the collapse of German property lender Hypo Real Estate Holding AG, and Erste Abwicklungsanstalt, the restructuring unit of state-owned lender WestLB AG, are both planning to take part in the exchange, according to people familiar with the matter. The two bad banks together hold as much as 9.8 billion euros in Greek debt.
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