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Big investors to join crucial bond swap deal

A dozen banks, insurers and investment funds holding Greece’s bonds will participate in a massive debt relief plan for the country, the group representing the private creditors said Monday as the deadline for the deal draws near.

BRUSSELS, Belgium — A dozen banks, insurers and investment funds holding Greece’s bonds will participate in a massive debt relief plan for the country, the group representing the private creditors said Monday as the deadline for the deal draws near.

The statement from the Institute of International Finance comes amid concern that not enough investors will voluntarily swap their Greek government bonds for new ones with a much lower face value, longer repayment deadlines and lower interest rates.

Without the debt relief, Greece won’t get a second, C130 billion ($172 billion) bailout from the other euro countries and the International Monetary Fund, and would face a messy default on its debts later this month.

Private creditors have until Thursday night to sign up for the bond swap, which could slice as much as C107 billion ($141.5 billion) off Greece’s C350 billion ($460 billion) debt pile.

Investors who participate would lose around 75 per cent of the value of their overall bond holdings.

But without the bailout, they would likely face much bigger losses, not only on their Greek holdings but also on investments in other vulnerable eurozone countries as turmoil spreads across the region’s financial markets.

The Institute of International Finance said the 12 big investors that have promised to participate in the plan include German insurer Allianz, French bank BNP Paribas, Germany’s Commerzbank and Deutsche Bank, as well as Greece’s Eurobank EFG and National Bank of Greece. The banking group did not say how much Greek debt these institutions hold.

The participation of these investors doesn’t come as much of a surprise since they were closely involved in negotiating the deal. Many of them also have close links to eurozone governments, which will be funding the bailout.

The bigger question will be whether less traditional bond investors, such as hedge funds that bought the bonds at a steep discount or may stand to profit from bond insurance payouts, will also sign up.

Stephen Lewis, chief economist at Monument Securities in London, said the fact that the 12 institutions promised to participate was nevertheless “a hopeful sign,” since they wouldn’t have been included in the Institute of International Finance panel that helped negotiate the deal if they didn’t hold a substantial amount of Greek debt.

The exact holdings of private investors are difficult to estimate, since they may have sold off some of their Greek bonds in recent months. But Lewis reckoned that large banks may hold some C50 billion to C75 billion in Greek bonds, while insurers may hold C25 billion to C50 billion.

If not enough institutions participate voluntarily, Greece has threatened to force losses on holdouts or withdraw the deal — a move that would automatically lead to an uncontrolled default.

Greek politicians have said they want investors holding at least 90 per cent of the debt in private hands to sign up to the deal. If that level is not achieved by Thursday night, Athens could extend the offer by a few days and would then face several options, depending on the participation rate.

Here are the different scenarios:

— Investors holding less than 66 per cent of the debt sign up: Greece withdraws the offer, loses the second bailout and defaults on all of its debt. In that case, not only the private investors but also the eurozone countries, the IMF, the European Central Bank and national central banks in the currency union face massive losses.

— Investors holding between 66 per cent and 74 per cent of the debt sign up: Greece uses new legislation to force losses on holdouts. That would likely trigger payouts on so-called credit default swaps — complex financial products that act as bond insurance — which the eurozone fears could cause panic on financial market.

— Investors holding between 75 per cent and 90 per cent of the debt sign up: Athens and eurozone finance ministers may force holdouts to accept the deal. They will discuss in a conference call the costs and benefits of triggering credit default swaps over a lower participation rate. Payout of CDS may cost the eurozone and investors more money because of the ensuing market panic, but a lower participation would likely require more bailout loans, which rich countries like Germany and the Netherlands have ruled out.

— Investors holding more than 90 per cent of the debt sign up: The offer and the bailout go ahead as planned. Greece now faces the challenge of implementing all the conditions attached to the rescue loans and slowly returning its battered economy back to growth.

Lewis of Monument Securities said a participation rate of more than 75 per cent but less than 90 per cent was most likely.

“Then it may get a bit messy,” he said, since that would kick off another round of negotiations between Athens and the other eurozone countries.