Investors negotiating deal to cut Greece's debt reportedly could lose more than 70% on their bond holdings; final deal could come within days
January 31, 2012
– Investors participating in a deal to slash Greece's massive debt would face an overall loss on their bond holdings of more than 70 percent, a person involved in with the negotiations said early Tuesday.
European leaders at a summit in Brussels said a final debt deal could be signed off in the coming days, together with a second multibillion-euro bailout package designed to save the country from a potentially disastrous bankruptcy.
Athens and representatives of investors holding Greek government bonds over the weekend came close to a final agreement designed to bring Greece's debt down to a more manageable level. Without a restructuring, those debts would swell to around double the country's economic output by the end of the year.
If the agreement works as planned, it will help Greece remain solvent and help Europe avoid a blow to its already weakened financial system, even though banks and other bond investors will have to accept big losses.
The person involved in the talks said Monday that the more-than 70 percent loss was the result of cutting the bonds' face value in half, reducing the average interest rate to between 3.5 per cent and 4 percent and pushing repayment of the bonds 30 years into the future. A second person briefed on the talks confirmed that the loss on the so-called net present value of the bonds would be around 70 percent.
Both people spoke on condition of anonymity because the talks are confidential.
The deal, which would reduce the country's debt by about euro100 billion ($131.1 billion) and save it billions of euros in interest payments, needs to be completed quickly. Greece runs the risk of a disorderly default on March 20, when it faces a euro14.5 billion bond repayment it cannot afford without additional help.
Many investors — banks, insurance companies and hedge funds — who hold Greek bonds also hold debt from other countries that use the euro, which could lose value if there is a fully fledged Greek default. This is the scenario the eurozone fears most and why the currency union hopes investors will voluntarily accept a partial loss on their Greek bonds.
The agreement taking shape is a key step before Greece can get a second, euro130 billion bailout. The country has been surviving since May 2010 on an initial euro110 billion ($144.21 billion) package of rescue loans from other countries using the euro and the International Monetary Fund.
Even a deal is inked, there is no guarantee that Greece won't need more help.
"It's too early now to say whether we will need some extra public funding," Greek prime minister Lucas Papademos said after a meeting with other top European officials in Brussels early Tuesday. "Our goal is to avert such an alternative."
More public sector support could either mean more bailout loans — something that the eurozone is reluctant to commit to — or a deal with the European Central Bank to also give Greece a break on its debt.
The ECB holds some euro55 billion in Greek government bonds, which it purchased at around euro40 billion in the early days of the debt crisis, according to analyst estimates. One option would be to allow Greece to buy back those bonds at the price the ECB paid to buy them, slicing another euro15 billion or so off what the country owes. However, so far the ECB has ruled out participating in any debt restructuring.
On top of restructuring its debt with private investors, Greece must also take other steps to secure further aid. It must cut its deficit and boost the competitiveness of its economy through layoffs of public sector workers and the sale of several state companies, among other moves.
Papademos said the so-called troika of debt inspectors — the European Commission, the ECB and the IMF — were calling for further spending cuts to meet budget targets and agreements to lower labor costs.
But Greece's partners in the eurozone have grown frustrated with the country's slow implementation of austerity measures and economic reforms promised almost two years ago. In recent days, they have discussed ways of monitoring Athens' efforts even more closely, including giving the European Commission, the power to block spending decisions that threaten the country's ability to repay its debts.
Earlier Monday, Greek lenders Eurobank and Alpha Bank said a planned merger to create the country's largest bank by assets could be put on hold because of the negotiations over the bond swap.
The banks said that "an accurate timeline cannot be given" to complete the deal announced last August because of the negotiations.
Greece's finance ministry expressed surprise at the announcement, arguing that the negotiations had produced "nothing new or different" to factors already taken into account by both banks.
Becatoros reported from Athens, Greece. Sarah DiLorenzo in Brussels contributed to this report.
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