Deal or Default?

Tension Rises as Greek Debt Swap Deadline Looms – Published on Spiegel Online International, by Ferry Batzoglou and David Böcking, March 8, 2012.

Investors are nervous as the clock ticks down to the deadline for Greece’s debt swap deal. The country’s private-sector creditors have to decide by Thursday evening if they want to take part or not, and it is unclear whether enough will sign up. If the deal collapses, Athens will not receive vital new bailout funds – making a default likely … //   

… Ruined by the State:

There is also massive resistance among average wage earners in Greece who invested their savings in government bonds, which were seen as safe. The majority of them are expected to decline the debt swap offer. Private individuals hold about €3.2 billion in Greek government bonds. “This affects more than 11,000 people and their families,” says Yiannis Tsolias of the association of private investors in Greek bonds. “Some people invested all their savings, which they earned above board. The government is ruining them.”

The IIF said on Wednesday that just 40 percent of private-sector investors have signed up for the deal so far. If not enough investors sign up by the deadline on Thursday evening, then Greece will have to resort to Plan B. The voluntary debt swap would then be abandoned. Instead, creditors would be forced to participate through the retroactive introduction of so-called collective action clauses (CACs).

This solution would be far more problematic. The rating agencies have warned that if the CACs are triggered, then they will declare Athens to be in default. That would reduce Greek bonds to irrevocable junk status, making it even more unlikely that the country will be able to return to raising money on the markets any time in the foreseeable future. Last week, two of the big three ratings agencies, Moody’s and Standard & Poor’s, already declared Greece to be in selective default.

And it is by no means certain that even a compulsory debt swap would succeed. Although the Greek parliament has created a legal basis for the retroactive introduction of CACs, there are hurdles to those clauses being triggered. At least 50 percent of investors have to participate in a vote over a compulsory swap and two-thirds have to agree to it. It is completely unclear whether this condition could be fulfilled.

Legal Disputes:

Even the two-thirds rule could be contested. Around €29 billion out of the around €206 billion worth of debt held by private-sector investors is not governed by Greek law, but by, for example, English or Japanese law. A 75 percent approval threshold applies on these bonds, making it easier for owners of these securities to put together blocking minorities. A number of hedge funds have supposedly been trying to do this for months, which would allow them to reject a debt swap. The result might be legal disputes that could go on for years.

If Athens’ Plan B should also fail, then the country could be faced with a disorderly bankruptcy — exactly the thing that the European Union and International Monetary Fund have been trying to prevent for the last two years. The EU and IMF have made a successful private-sector debt swap a condition of releasing the second bailout for Greece, which was agreed upon at a Euro Group meeting in February and is worth €130 billion. If the haircut does not happen, then Greece would default on March 20, when €14.5 billion in loans mature.

It’s safe to say that the tension will not abate as the clock ticks down to the Thursday evening deadline. The Greek government will announce the results at 7 a.m. CET on Friday. (full long text).

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