Major Greek bondholders voiced their support on Monday for a deal that will more than halve the value of their holdings as their contribution to keeping the country afloat.
The steering committee of creditors, which includes 12 major investors in Greek bonds and was involved in drawing up last month’s landmark deal, said it would accept the bond swap offer.
Earlier, Greek Finance Minister Evangelos Venizelos warned Athens’ private creditors the bond exchange was the best deal they would get and that he would not hesitate to activate laws forcing losses on bond holders who did not willingly sign up.
“Whoever thinks that they will hold out and be paid in full is mistaken,” Mr. Venizelos told Reuters in an interview. “We are ready to activate CACs [collective action clause to enforce losses]if needed.”
Greece and its creditors are in the final stages of talks aimed at a deal that would cancel more than €100-billion euros ($132-billion) of its private sector debts – a key part of a €130-billion bailout, the second rescue Athens has required.
The lenders, mainly banks, insurers and investment institutions, have to reveal their intentions by Thursday night.
The latest move is seen as an attempt to build up momentum before the deadline, and follows weekend comments from the Institute of International Finance (IIF) bank lobby group that it was confident the bond swap would be completed this week.
Greece is expected to deploy collective action clauses to compel those who decline the offer to take the loss on the value of their bonds.
Sweeping up these investors would maximize the benefit to Greece, mean such holdouts do not stand to get a better deal by pursuing legal action, and make the process more straightforward.
Bond holders have until 8 P.M. GMT on Thursday to accept the offer of new bonds, which have a longer maturity and pay a lower rate of interest, for their existing ones.
The deal clinched by euro zone finance ministers in the early hours of Feb. 21 involves investors taking a nominal 53.5-per-cent loss, which equates to a real 73- to 74-per-cent loss after taking into account the loss on future interest payments.
The IIF has refused to estimate how much of Greece’s €206-billion the steering committee holds.
The group holds about €45-billion of Greek bonds, according to calculations by Reuters, based on their latest disclosures. Their holdings have varied during more than seven months of negotiations as some creditors have sold their holdings.
About a quarter of privately held Greek debt is estimated by industry sources to be in the hands of hedge funds. Their intentions have not been made clear and some expect them to leave a decision until the very last minute.
The steering committee includes banks, insurers, asset managers and hedge funds like BNP Paribas, Deutsche Bank, National Bank of Greece, Allianz and Greylock Capital Management. A wider creditor group included more than 30 firms.
Under the deal agreed with euro zone officials and the IMF last month, government debt holders are being asked to swap their old bonds for a package of new English law Greek bonds and securities issued by Europe’s rescue fund.
Mr. Venizelos said he was optimistic participation would be over 90 per cent, with investors lured by the sweeteners offered – a cash equivalent upfront payment, a GDP warrant offering higher interest if the Greek economy does better than expected and equal treatment for the new bonds with the public sector.
Greece has said it wants 90 per cent take-up. If it falls below that but exceeds 75 per cent, it will consult with its EU and IMF partners on how to fill the gap, with or without activating CACs. Below that level, the deal would be off, potentially plunging the euro zone back into crisis.
The debt swap is made more complex by the fact that some of the bonds are governed by Greek law, while others were issued under English law and there are thresholds set for both.
There are €177-billion of Greek law bonds. To trigger the CAC on these, a majority of investors need to participate in the offer, and two-thirds need to accept. So acceptances from investors holding as little as €60-billion could trigger the compulsory buyout.
For the international bonds, acceptance of 75 per cent is needed to trigger the so-called sweep-up.
The body that rules on whether bond insurance contracts – which could pay out for some bondholders to make good their losses – have been triggered, said last week that Greece had not yet breached the terms of its contracts.
But given the scale of the loss by investors, market participants expect an eventual payout on credit default swaps (CDSs) once the offer completes.
There is a net $3.25-billion of the CDSs held by investors, meaning the fallout of payouts on them should be manageable, given the scale of Greece’s sovereign restructuring, which is the largest ever.