Greece to investors: take a haircut so we can get our bailout

It’s crunch time again in Athens: Private creditors have until 10:00 p.m. local time to decide if they are going to take part in a debt swap deal that is part of a financial rescue package for Greece. Without the debt swap, a critical second international bailout will not be launched, and without fresh money, the country will descend into an uncontrolled default with unpredictable consequences not just for Greece but also the global economy.

“It is going well, we are optimistic,” a government official told Reuters this morning. “The pace of responses to the bond offer is good, the percentage of bondholders tendering voluntarily is very high," said the official, who spoke on condition of anonymity. 

The Greek state owes about €350 billion ($461.6 billion), or 160 percent of GDP, to international and domestic lenders. Private investors currently hold about €206 billion ($272 billion) of Greek bonds, €107 billion ($141 billion) of which the debt swap is meant to shave off.

According to the deal the Greek government negotiated with the Institute of International Finance (IIF), which represents most of Greece's private sector creditors, investors will write off 53.5 percent of debt – which amounts to a waiver of 74 percent when the loss in future interest is taken into account – and exchange the rest of bonds they are holding into new papers which are worth less, have a longer maturity, and pay less interest.

A key word of the deal is “voluntary.” If 90 percent of the creditors accept the deal, Greece can force the remaining 10 percent to sign on through so-called Collective Action Clauses (CAC) – and still claim that a voluntary arrangement has been reached. If the voluntary element is missing from the deal, rating agencies and analysts are likely to consider the debt swap to be a “credit event": a default.

If less than 90 percent but more than 75 percent accept the deal, further consultations with lenders would have to show if the voluntary principle could be claimed when CACs came into play. Anything below 75 percent would mean failure, and again – default. 

The outcome is open. On March 6, Ulrich Schröder, head of Germany’s state-owned investment bank KfW, told reporters in Frankfurt he had reasons to believe that fewer investors than necessary would accept the deal. Jittery markets were an indication for that prospect. “I’d be glad if I was wrong,” Schröder said.

EU Monetary Affairs Commissioner Olli Rehn was optimistic. “According to our information, the deal is going well,” he said in Brussels. “The debt swap is financially interesting for the investors.”

By this morning, a number of key investors had already said they would back the deal, among them the German insurer Munich Re, French bank BNP Paribas, and Greece’s six largest banks, cumulatively the biggest private holders of the country’s debt. By the early evening, Athens reported that 75 percent of investors had already signed on.