THE SECOND EU-IMF bailout of Greece hits a crucial milestone tomorrow night as the deadline is reached for the country’s private creditors to sign up for a bond swap to cut up to €107 billion from its national debt.
Greece’s execution of this “voluntary” transaction with bondholders is a precondition for the release of the €130 billion EU-IMF loan package the country needs to avoid defaulting later this month.
The banking lobby representing the creditors – the Institute of International Finance – is known to have warned in recent days that any disorderly default could cost up to €1 trillion and leave Italy and Spain reliant on external support.
There is some confidence in European and banking circles that the swap will proceed. It depends on a minimum of 75 per cent support, and anything less would put the entire plan in jeopardy.
The level of participation will be in doubt until the offer closes and this, in turn, will determine what happens next. The transaction will cut 53.5 per cent from the face value of Greek bonds.
Euro zone finance ministers plan a teleconference meeting on Friday to review the deal, which is designed to put Greece’s debt on a “sustainable” footing by 2020.
Athens warned yesterday it would compel bondholders who declined the offer to participate by invoking a retrospective law enacted by the Greek parliament in recent days. The arrangement will go ahead automatically if 90 per cent or more of the creditors agree to participate. If more than 75 per cent but less than 90 per cent agree, Greece will be empowered to trigger “collective action clauses” to compel the holders of debt issued under Greek law to take part.
The Greek ministry of finance yesterday declared its willingness to go down this road, potentially leaving the government open to legal challenge from investors who wish to collect all their money.
Such a move, never before carried out by a sovereign debt issuer in respect of its own bonds, would be likely to have an impact on the country’s borrowing costs whenever it tries to access markets.
Citing comments by the country’s debt agency at a meeting with German banks, the statement said its representative had noted the rescue programme “does not contemplate the availability of funds to make payments to private sector creditors” that decline to participate in the swap.
“The republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law-governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds.
“Consequently, all obligations of the republic to pay holders of those bonds any amount on account of principal will be amended to permit the republic to discharge these obligations in full by delivering to the holders of the amended bonds on the settlement date the consideration described in the invitations.”