The clock is ticking down to the deadline for Greece’s private creditors to participate in a bond swap deal that would allow the country to restructure its debts under the most recent Greek bailout agreement.There’s just one burning question that must be answered before the deal goes through, however. Will 75 per cent of private sector Greek bondholders agree to take these massive losses voluntarily so that Greece can go through with the bailout?
These bondholders will have until 3 PM EST on Thursday to decide whether or not to voluntarily accept a 53.3 per cent haircut on the value of their bonds by swapping them for longer-dated securities.
This morning, the steering committee of the Institute of International Finance (IIF)—the organisation that has been negotiating the bond swap deal as banks’ representatives—said it would participate in the deal, according to Reuters.
This means that BNP Paribas, Deutsche Bank, National Bank of Greece, Allianz and Greylock Capital Management, among financial institutions have all pledged to take part in the deal.
More troublesome for the plan, however, are the hedge funds who have said they will hold out from the deal—at least until they are forced to participate. It’s all a delicate balance around provoking a credit event, which would trigger payouts of credit default swaps (essentially, insurance contracts on Greek bonds), and would reimburse these institutions for some of the losses on their debt holdings.
Reuters estimates that these hedge funds amount to about a quarter of Greece’s bondholders, but the exact distribution of debt holdings remains unclear. Hypothetically, if all these hedge funds decided to hold out from the bond swap offer, then Greece might not achieve the 75 per cent participation it needs to trigger CAC clauses (where a majority of bondholders force the rest to take writedowns) and go through with the deal at all.
Based on participation in the bond swap deal, there are three basic possibilities for Greece and its debt holders:
- If Greece gets 90% participation, the CAC clauses will be written into the bonds but will not need to be activated. This would probably not trigger a credit event.
- If Greece gets 75-90% participation, it could decide to activate the CAC clauses, provoking a credit event but coercing full participation in the swap. It might also decide not to do so.
- If Greece gets less than 75% participation in the debt swap then it’s going to scrap the debt swap altogether.
Regardless of its implications for Greece’s debt sustainability, that last outcome is frightening for the eurozone. Not only would the region realise an estimated €1 trillion ($1.32 trillion) or more in losses if Greece were to experience a disorderly default (according to a leaked IIF document), but the impact of contagion throughout the financial system is simply incalculable.