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Greek Debt Swap


Greek Bond Swap

Private creditors have until Thursday night to sign up for the bond swap, which could slice as much as €107 billion ($141.5 billion) off Greece’ €350 billion ($460 billion) debt pile.

Investors who participate would lose around 75 per cent of the value of their overall bond holdings.

But without the bailout, they would likely face much bigger losses, not only on their Greek holdings but also on investments in other vulnerable Eurozone countries as turmoil spreads across the region’ financial markets.

The Institute of International Finance said the 12 big investors that have promised to participate in the plan include German insurer Allianz, French bank BNP Paribas, Germany’ Commerzbank and Deutsche Bank, as well as Greece’ Eurobank EFG and National Bank of Greece.

The banking group did not say how much Greek debt these institutions hold.

The participation of these investors doesn’t come as much of a surprise since they were closely involved in negotiating the deal.

Many of them also have close links to Eurozone governments, which will be funding the bailout.

The bigger question will be whether less traditional bond investors, such as hedge funds that bought the bonds at a steep discount or may stand to profit from bond insurance payouts, will also sign up.

The exact holdings of private investors are difficult to estimate, since they may have sold off some of their Greek bonds in recent months. But Stephen Lewis, chief economist at Monument Securities in London, reckoned that large banks may hold some €50 billion to €75 billion in Greek bonds, while insurers may hold €25 billion to €50 billion.

If not enough institutions participate voluntarily, Greece has threatened to force losses on holdouts or withdraw the deal — a move that would automatically lead to an uncontrolled default. Greek politicians have said they want investors holding at least 90 per cent of the debt in private hands to sign up to the deal. If that banks may hold some €50 billion to €75 billion in Greek bonds, while insurers may hold €25 billion to €50 billion.

If not enough institutions participate voluntarily, Greece has threatened to force losses on holdouts or withdraw the deal — a move that would automatically lead to an uncontrolled default.

Greek politicians have said they want investors holding at least 90 per cent of the debt in private hands to sign up to the deal. If that level is not achieved by Thursday night, Athens could extend the offer by a few days and would then face several options, depending on the participation rate.

Here are the different scenarios:

Investors holding less than 66 per cent of the debt sign up: Greece withdraws the offer, loses the second bailout and defaults on all of its debt. In that case, not only the private investors but also the eurozone countries, the IMF, the European Central Bank and national central banks in the currency union face massive losses.

Ñ Investors holding between 66 per cent and 74 per cent of the debt sign up: Greece uses new legislation to force losses on holdouts. That would likely trigger payouts on so-called credit default swaps — complex financial products that act as bond insurance — which the eurozone fears could cause panic on financial market.

Investors holding between 75 per cent and 90 per cent of the debt sign up: Athens and eurozone finance ministers may force holdouts to accept the deal. They will discuss in a conference call the costs and benefits of triggering credit default swaps over a lower participation rate. Payout of CDS may cost the eurozone and investors more money because of the ensuing market panic, but a lower participation would likely require more bailout loans, which rich countries like Germany and the Netherlands have ruled out.

Investors holding more than 90 per cent of the debt sign up: The offer and the bailout go ahead as planned. Greece now faces the challenge of implementing all the conditions attached to the rescue loans and slowly returning its battered economy back to growth.

Lewis of Monument Securities said a participation rate of more than 75 per cent but less than 90 per cent was most likely.

“Then it may get a bit messy,” he said, since that would kick off another round of negotiations between Athens and the other eurozone countries.

In the US, worries about Greece come on top of concerns about a recession in Europe and slowing economic growth in China.

Some investors also believe the rally in US stocks this year — the Standard & Poor’ 500 is up seven per cent — has come too far too fast.

On Tuesday, the S&P 500 was down 19 points at 1,345 at midday. The Nasdaq composite index fell 41 points to 2,910. All 10 industry groups in the S&P 500 were lower, with materials stocks and banks leading the decline.

All but one of the 30 stocks that make up Dow, Kraft Foods, declined. Caterpillar, which makes heavy equipment and depends heavily on China for profits, fell 3.5 per cent, the worst of the Dow 30.

Oil prices slipped $1.71 to US$105.01 per barrel on the New York Mercantile Exchange. New York crude has risen from US$96 last month amid fears of a disruption in global oil supplies driven by the potential for military conflict with Iran.

The price of gold fell $33 per ounce, or 1.9 per cent, to US$1,671 per ounce. Silver, platinum and copper all fell more than 2 per cent, because of concerns about Europe and weaker economic demand in China.