Greece formally launched a bond swap offer to private holders of its bonds on Friday, setting in motion the largest-ever sovereign debt restructuring in the hope of getting its messy finances back on track.
The swap is part of a second, €130-billion ($175-billion U.S.) rescue package to claw Greece back from the brink of a disorderly default that had threatened to send shockwaves through the financial system and punish other weak euro zone members.
The complex deal was finalized this week after months of tortuous negotiations between Greece and its bondholders that were complicated by European partners driving a hard bargain, hedge funds holding out for a default and pressure on public creditors like the European Central bank to chip in.
The swap, in which investors will trade bonds for lower-value debt securities, aims to slice €100-billion off Greece’s over €350-billion debt load.
The head of the International Institute of Finance (IIF), a bank lobby group that negotiated on behalf of the private sector, expressed optimism that the exchange would attract high participation from investors.
“We remain quite optimistic that once investors study this proposal ... there will be high take-up,” Charles Dallara, IIF managing director, said at the G20 meeting in Mexico City.
Greece’s announcement Friday confirmed terms of the swap released earlier this week when the deal was struck.
Banks, insurers and other investors holding about €206-billion of Greek government bonds will take a 53.5 per cent loss in the face value of their securities, with actual losses estimated at 73 to 74 per cent.
As part of the swap, investors will pocket longer-dated Greek bonds worth 31.5 per cent of their holdings and short-term paper issued by the European Financial Stability Fund (EFSF) equal to 15 per cent of their old bonds.
The new bonds will carry an average coupon of 3.65 per cent over the 30-year period and be governed by English law.
The debt swap, also known as private sector involvement, is designed to cut Athens’ debt load to 120.5 per cent of its gross domestic product by 2020 from 160 per cent, in the hope that it would open the way for its eventual return to bond markets.
The debt exchange and the new bailout also buy time to stabilize the 17-nation euro zone currency bloc and shield it against a Greek default, which remains a long-term threat.
Despite offering some relief to Greeks and policy makers fretting about an imminent bankruptcy, the deal has yet to quell doubts about the viability of Greek debt and whether the stricken nation can get back on its feet.
The overall bailout package comes at the price of painful austerity measures that ordinary Greeks say have impoverished them. A mix of tax hikes and wage and pension cuts have sent unemployment soaring, shuttered businesses and brought thousands of Greeks out on the streets for near-daily protests.
Athens has said it wants to conclude the transaction by March 12. Focus now turns to the participation rate in the swap, with Athens also predicting a high take up.
“There is optimism in the government that there will be big participation in the swap,” a Greek government official said.
Greece said it was not obliged to carry out the swap unless it had 90 per cent participation. If the participation was below 90 per cent but above 75 per cent, then Greece would consult with its public creditors.
If the rate were less than 75 per cent and it did not receive required consents, it would not go through with the deal, it said.
Greece has passed legislation introducing so-called collective action clauses (CACs) that allow it to force all bondholders to proceed with the swap once it has secured a specified level of approval.
Based on the recently approved law, the exchange will go ahead once 50 per cent of bondholders have responded to the offer and the CACs will be activated once a two-thirds majority of that quorum has voted in favour of the swap.
“In my discussions ... no decision has been made on whether or not they will activate those collection action clauses,” Mr. Dallara said. “Should they decide to activate, of course it does raise concern, including other sovereign issues.”
Under the deal, investors will also get separate GDP-linked securities which will provide annual payments of up to 1 per cent of the notional amount of the new bonds if the country’s economic growth rate exceeds a certain threshold.
Greece appointed Deutsche Bank and HSBC to act as closing agents.
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