Investors holding $125 billion in Greek debt agree to bond swap as Thursday deadline looms

3/7/2012

BRUSSELS — Greece saw participation by private investors in its massive debt relief deal rise on Wednesday, a little over 24 hours before the deadline for acceptances, bringing the country closer to avoiding default.

Private investors owning about 46 percent of Greece's privately-held debt have so far committed publicly to the bond swap. For the deal to work — and for Greece to secure a related €130 billion ($171 billion) international bailout — Athens needs 90 percent of investors to sign up. However, a voluntary participation rate of around 70 percent could be enough to force most holdouts to go along.

The Institute of International Finance, which has been leading the debt talks for large private creditors, said firms holding €81 billion ($106 billion) of Greek bonds have agreed to the deal. The 30 firms include 12 banks and investment funds that already declared their participation on Monday as well as all major Greek banks.

On top of that, Greek Finance Minister Evangelos Venizelos said some €14 billion in bonds owned by Greek investment funds but managed by the central bank would also be added to the debt relief. Greek officials said they are hopeful that funds that directly manage another €3 billion in bonds would also sign up.

Under the deal, private creditors will swap their Greek bonds for new ones with a face value reduced by 53.5 percent, longer repayment deadlines and lower interest rates. Overall, they will lose some 75 percent on their bondholdings.

Greece says that despite the losses the debt swap is a good deal for investors, since they would go empty-handed if the country can't secure a €130 billion bailout from the eurozone and the International Monetary Fund that is tied to the debt relief.

Investors holding a total of €206 billion ($271 billion) in Greek bonds have until Thursday evening to decide whether they want to participate in the bond swap. If all of them sign up, the deal would wipe €107 billion off Greece's €350 billion debt pile.

At the very least, Greece needs to reach a voluntary participation rate of 66.7 percent of investors holding bonds issued under Greek law. That number would allow it to force the deal onto holdouts using new legislation it passed through Parliament last month.

For a small portion of Greek bonds that have been issued under foreign law, forcing investors to participate is more difficult. In most of the foreign law bonds, 75 percent of investors have to vote in favor of the deal to make it binding for all. However, in contrast to the Greek law bonds, the voting for the foreign law bond takes place separately for each individual issue. That means it is much easier for speculators to buy blocking majorities and derail the swap for certain bond issues.

Adding up the €81 billion in bonds from the IIF institutions and the €14 billion from Greek investment funds would take the participation rate to just above 46 percent. Other, smaller investors that are not part of the IIF may also already have tendered their bonds for the swap without announcing so publicly.

Greek and European officials have expressed confidence that they will get the necessary participation to make the deal work.

Adding pressure on undecided investors, the Greek debt agency warned Tuesday that the country just does not have the money to repay holdouts in full. That means that if they do not accept the bond swap, they may face a full default, and therefore much steeper losses, on their bonds.

Venizelos on Wednesday sharply criticized domestic five Greek social-security funds that decided not to participate in the debt relief.

He said the five funds control only about €3 billion worth of Greek debt but accused them of "undermining" the national effort to secure the deal, without which Greece will lose its international cash lifeline and likely be forced out of the eurozone.

"What kind of message are we Greeks sending?" he told private Real FM Radio. "Is our message that we prefer the country to go bankrupt and the social security funds' bonds to be totally wiped out? If (the bond swap) does not succeed, what will these bonds be worth? They will be worth a big zero. Because the country will have been wiped out."

Greece has depended on international rescue loans since May 2010 and has had to implement stringent austerity measures in return for rescue loans from eurozone countries and the IMF. The country is in its fifth year of deep recession, and unemployment is at a record high of 21 percent.

Earlier Wednesday, prison guards launched rolling 24-hour strikes to protest income cuts and crowded detention conditions. While not affecting jail security, the strike will stop prison visits and transfers of prisoners.

And dozens of police unionists in yellow police vests occupied their social security fund building in Athens, calling for greater transparency in the management of its finances.