Greece will restructure its debt next month via private sector participation and debt forgiveness provided by the European Central Bank in the first developed market default (albeit controlled) in 60 years.
While the level of investor participation in the deal—a mandatory piece of making this default “selective” or controlled versus disorderly—is still up in the air, the general map of what will happen in Greece under a variety of circumstances is now clear.
A basic overview:
- Holdings of Greek bonds held by the Eurosystem (the European Central Bank and National Central Banks) have agreed to receive less interest from these securities than promised upon their purchase.
- These Eurosystem banks will contribute their future profits on current holdings of Greek bonds to the bailout from now through 2020.
- More importantly, there are a number of possible outcomes for the private sector involvement, all based on the percentage of Greece’s private creditors agree to participate voluntarily in the bond swap plan.
- At minimum, 75% participation is necessary for Greece to avoid a hard default.
In a note published this morning, analysts at Morgan Stanley took a deeper dive into the possibilities that private sector participation could produce:
Photo: Morgan Stanley
General consensus is that Greece receives 75 to 90 per cent voluntary participation in the deal and must decide whether or not to activate the collective action clauses it retroactively inserted in Greek bonds. If it did so, this would all but assuredly provoke a credit event, causing credit default swaps (insurance contracts on Greek bonds) to be paid out.
While this latter case could have unknown effects since the CDS market is pretty opaque, investors generally agree that this scenario has been priced in.
We’ll know more about how many investors will participate voluntarily in the debt swap as we near the March 12 deadline to register in the bond swap.
There are still lots more questions to be answered in Greece about growth and debt sustainability, and many consider this selective default to be the first of many likely restructurings.