Greece Pushes Through Debt Swap

Euro ministers meeting to sign off on second bailout.

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

The euro fell and stocks erased initial gains after the government in Athens today said that it will trigger an option forcing some investors to take part in the exchange, allowing it to clear a 90 percent target rate for participation. Germany and fellow euro-area governments declared the debt swap a success.

Attention now shifts to euro-region finance ministers, who brought forward a planned conference call to 12:30 p.m. Brussels time. They must decide whether the swap warrants proceeding with a 130 billion-euro second bailout package designed to prevent a collapse of the Greek economy. Officials from the International Swaps and Derivatives Association are to meet 90 minutes later to consider a “potential credit event” relating to Greece.

“The debt-swap results show that international markets see the prospects the Greek economy has to regain a sustainable fiscal situation,” Greek Finance Minister Evangelos Venizelos told lawmakers in Athens in comments televised live on state-run Vouli TV. Participation “surpassed expectations,” he said.

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.”

With Greece now in a fifth year of recession, Prime Minister Lucas Papademos’s government had said that it was ready to use collective action clauses to force holders of Greek-law bonds into the swap if the private sector involvement fell short and it got approval from investors to change the bonds’ terms. The use of collective action clauses may trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.


Cabinet Recommendation

The goal of the exchange is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent, thus helping cut Greece’s debt level to 120.5 percent of gross domestic product by 2020. Venizelos said that he will recommend to Cabinet today the authority to activate collective action clauses, following consultations with his euro counterparts.

“This is a dangerous precedent that has been set,” John Wraith, fixed-income strategist at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “Countdown” with Linzie Janis and Owen Thomas. For Greece, “yes, it is probably necessary, but it is just another hurdle crossed rather than some sort of solution.”

The euro weakened for the first time in three days, dropping 0.35 percent to $1.3227 as of 12:51 p.m. in Athens. The Stoxx Europe 600 Index was little changed at 264.14 after Asian stocks posted the biggest-two day rally since January.

“There was a small possibility that for whatever reason, the participation would be so high that the CACs may not need to get triggered,” Pawan Malik, managing director of Navigant Capital, said in a Bloomberg Television interview. “For the markets this may be a mild negative today.”

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.

Chancellor Angela Merkel is “pleased” about the “high level 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.”

German Finance Minister Wolfgang Schaeuble is due to hold a press briefing at 2 p.m. Berlin time on the results of the conference call with his euro-area counterparts. Finance ministers may agree to free incentives tied to Greece’s bond swap and aid to cover interest during their conference call, German Finance Ministry spokesman Martin Kotthaus told reporters in Berlin. They will probably hold off on discussing the main rescue package for Greece until next week, he said.

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.”


 Bloomberg News


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