Investors Agree to Swap About 85% of Greek Debt

By Christos Ziotis and Maria Petrakis - Mar 9, 2012 5:22 AM GMT+0700

Private investors agreed to swap about 85 percent of their Greek government bonds for new securities in the biggest sovereign debt restructuring in history, according to a banker briefed on the results.

Preliminary indications showed that as much as 155 billion euros ($205 billion) of the 177 billion euros of Greek-law bonds were offered, said the banker, who declined to be identified. Twelve billion euros of debt not under Greek law was also tendered, as was 7 billion euros of bonds from state-owned companies guaranteed by the government, the banker said.

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Greek police demonstrate on March 7, 2012 against the participation of pension funds in an upcoming debt-swap deal between the Greek state and private bond holders. Photographer: Louisa Gouliamaki/AFP/Getty Images

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March 8 (Bloomberg) -- Nicholas Burns, a former U.S. undersecretary of state, talks about the Greek debt crisis and the outlook for success of the country's debt swap and planned austerity measures. He speaks with Mark Crumpton on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

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March 8 (Bloomberg) -- Michael Woolfolk, managing director at Bank of New York Mellon Corp., Douglas Borthwick, managing director at Faros Trading, and Sophia Kalantzakos, a professor at New York University, talk about private investor participation in Greece's sovereign-debt restructuring. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)

With Greece again the focus of the euro-area debt crisis now in its third year, the goal of the exchange is to reduce the 206 billion euros of privately held Greek debt by 53.5 percent. Together with a 130 billion-euro second Greek aid package, the writedown is a key element in European leaders’ efforts to turn the tide against the crisis that has roiled Europe, forcing Ireland and Portugal to follow Greece in requiring bailouts.

The euro and stocks gained before the offer’s close at 10 p.m. in Athens as Prime Minister Lucas Papademos told his Cabinet ministers he looked forward to “the maximum possible participation of the private sector,” according to an e-mailed transcript of his comments.

90 Percent?

The offer went very positively and a final result will be released today at 8 a.m. in Athens, a government official said. The number of bonds tendered in the swap is still being tallied, said the official, who declined to be identified.

Finance Minister Evangelos Venizelos will hold a press conference at 1 p.m. Athens time, the Finance Ministry said in an e-mailed statement.

“Unofficially we’ve been hearing that the acceptance rate has crossed 90 percent,” Hans Humes, president of Greylock Capital Management, said in a Bloomberg Television interview. “The deal is done and we’re going to have to see how the market reacts.” Humes is a member of a committee of private bondholders that negotiated the deal with the government.

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, agreed to the offer.

While Greece would prefer a voluntary deal, the government has said it will use so-called 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 Greek government had said it wanted participation above 90 percent and was seeking a minimum level of 75 percent.

Risk ‘Too High’

“Ideally we get above 90 and it doesn’t need to be done,” said Geoffrey Yu, a currency analyst at UBS AG, said in an interview with Bloomberg Television’s Caroline Hyde yesterday.

Compelling holdouts to take part would likely trigger insurance contracts on the debt known as credit default swaps.

“We don’t see the Greeks failing to get a deal because the risk for everyone involved is just too high,” Tobias Basse, a cross market strategist at Norddeutsche Landesbank, said yesterday in a telephone interview.

The 17-nation euro strengthened the most in two weeks against the dollar before the deadline, gaining 1 percent to $1.3278 as of 8:51 p.m. in Berlin. European stocks rallied the most in a month, with the Stoxx Europe 600 Index advancing 1.6 percent to 264.16 at the close in London.

Time to Prepare

“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 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.

The swap is meant to help reduce Greece’s debt to 120.5 percent of gross domestic product by 2020, from about 160 percent currently. Greece is now in its fifth year of a recession.

The amount of the country’s bonds that is under other than Greek law totals 29 billion euros, or 14 percent of the amount eligible for the swap, Frankfurt-based KfW said. Those bonds are governed by different rules and aren’t subject to the collective action clauses retroactively added to the Greek-law debt.

To contact the reporter on this story: Christos Ziotis in Athens at cziotis@bloomberg.net Maria Petrakis at mpetrakis@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net