Greece Reaches Agreement on Biggest Sovereign Restructuring

Greece Reaches Agreement on Biggest Sovereign Restructuring

Greece reached an agreement with its
private creditors to secure the biggest sovereign restructuring
in history, paving the way for a second bailout of the debt-
ridden nation and averting an economic collapse.
Investors will forgive 53.5 percent of their principal and
exchange their remaining holdings for new Greek government bonds
and notes from the European Financial Stability Facility, the
International Institute of Finance said in a statement today
after a final round of talks overnight. The coupon on the new
bonds was set at 2 percent until February 2015, 3 percent for
the next five years and 4.3 percent until 2042.
Greece needed to reach the deal to secure a 130 billion-
euro ($173 billion) second bailout from European governments
last night, or risk a default that could endanger the 13-year-
old monetary union. The country’s debt was forecast to balloon
to almost double the size of its shrinking economy this year
without the write-off, the European Commission said in November.
“It’s better for banks to fork up a little bit more money
than risk the contagion of an uncontrolled Greek default,” said
Georg Kanders, a Dusseldorf, Germany-based analyst at WestLB AG.
“Most investors will accept the deal. Banks have already
written down the value of their Greek debt, so the impact should
be limited.”

Collective Action Clauses

Greece’s government said separately it will introduce
legislation to Parliament for so-called collective action
clauses that will allow it to enforce losses on bondholders that
refuse to take up the offer.
The 43-member Bg Europe Banks and Financial Services
Index fell 0.9 percent by 12:05 p.m. Frankfurt time. The
benchmark has gained 9 percent in the past month.
“It will be up to individual investors to determine their
own particular courses, following their own internal
processes,” Charles Dallara, who as managing director of the
Washington-based IIF led the talks on behalf of bondholders,
said at a press conference in Brussels today. He expects strong
participation from investors. “This is a solid deal for
investors a fair deal for all parties and one that holds
considerable benefits for Greece.” The swap could start as soon
as this week, he said.

74 Percent Loss

The agreement will reduce Greece’s debt burden by 107
billion euros, about half the country’s estimated gross domestic
product for 2011, the IIF said. The swap is meant to help reduce
the debt to 120.5 percent of GDP by 2020.
Bondholders will exchange 31.5 percent of their principal
into 20 new Greek government bonds with maturities of 11 to 30
years and the remainder into short-dated securities issued by
the EFSF. The new securities will be governed by English law.
Investors will suffer a net present value loss of about 74
percent, said Guillaume Tiberghien, a London-based analyst at
Exane BNP Paribas.
Separate securities linked to the future growth of the
Greek economy will be offered to investors, potentially boosting
the yield they receive in the event that growth exceeds
currently anticipated levels, according to the statement. There
will be an annual cap on the amount payable on the securities to
avoid an “undue burden” on Greece in the future, the IIF said.

EU Summit

At an Oct. 26 summit of European Union leaders in Brussels,
private bondholders agreed to take a 50 percent loss on the face
value of about 205 billion euros of Greek debt. Subsequent talks
between lenders, Greece and the “troika” of the European
Commission, International Monetary Fund and European Central
Bank revolved around structuring the swap in a way that would
achieve the country’s debt target while keeping the transaction
voluntary.
Negotiators struggled during more than three months of
talks to try to craft a voluntary deal that provides the debt
relief Greece requires while attracting enough participation
from bondholders. After two years of wage cuts and tax
increases, the Greek economy shrank 6.8 percent last year,
compared with a 6 percent contraction projected in the
government’s 2012 budget.
Greece is now in its fifth year of a recession. Prime
Minister Lucas Papademos’s government on Feb. 13 passed through
Parliament a new package of austerity measures demanded by the
troika in exchange for the second bailout. It got its first
financial lifeline in May 2010.

Shrinking Economy

The debt sustainability analysis provided by the EU and
IMF, dated Feb. 15, shows the Greek economy will contract by 4.3
percent to 4.8 percent this year. The baseline scenario shows
debt peaking at 168 percent of GDP in 2013. The economy won’t
return to growth until 2014, the report found.
The worsening economy put the debt-cutting target in doubt
and forced bondholders to accept bigger losses. At the start of
talks in November, creditors wanted an 8 percent coupon on the
new securities, a person with knowledge of the discussions said.
By the turn of the year, the parties were converging toward 4
percent, before the IMF and Germany intervened, demanding an
interest rate below 3 percent, said the person, who declined to
be identified because the discussions were private.
Jean-Claude Juncker, Luxembourg’s prime minister and the
head of the panel of euro finance ministers, outlined a middle
path on Jan. 24, saying the bonds should have a coupon of less
than 3.5 percent until 2020 and below 4 percent “over the total
period.”

Deutsche Bank

Deutsche Bank AG Chief Executive Officer Josef Ackermann,
who has played a key role in negotiations as chairman of the
IIF, has warned that a failure to rescue Greece could lead to a
“meltdown” far beyond the collapse of Lehman Brothers Holdings
Inc. in 2008. The fall of the New York investment bank sparked
the biggest financial crisis since the Great Depression, which
led to losses of more than $2 trillion and taxpayer bailouts
from London to Berlin to Washington.
Hedge funds holding Greek bonds may resist the deal and
seek to get paid in full, either by the Greek government or by
triggering payouts from insurance contracts known as credit-
default swaps. Investors in Greek debt that are hedged with
credit-default swaps would be paid the face value of their
holdings in exchange for the underlying securities or the cash
equivalent if the insurance contracts are triggered.
A trigger would be avoided if Greece and its creditors
reach a voluntary agreement, or one that’s not binding on all
holders, while use of a collective-action clause to impose
losses on investors holding out against the exchange could
trigger the contracts, according to rules of the International
Swaps & Derivatives Association.

Credit-Default Swaps

Credit-default swaps cover a net $3.2 billion of Greek
debt, less than 1 percent of the country’s bonds outstanding.
“If the voluntary participation is not close to full,
using collective action clauses, and triggering CDS, would be
necessary,” said Alberto Gallo, a strategist at Royal Bank of
Scotland Group Plc in London. “There is a large gap between an
agreement and implementation of reforms. Even with the haircut,
the risk of the debt being unsustainable remains.”
Papademos came into office on Nov. 11 as head of an interim
government charged with overseeing implementation of the Oct. 26
loan package, including the debt swap agreement. Antonis
Samaras, leader of the country’s second biggest parliamentary
party, has said that elections should be held after the debt
swap has been implemented and the loan accord secured.
The amount of debt eligible to swap is more than three
times the $81.8 billion that Argentina made eligible for its
2005 restructuring, previously the biggest sovereign debt swap.

Steering Committee

The creditors’ steering committee that negotiated the debt
swap included representatives from banks and insurers with the
largest holdings of Greek government bonds, including National
Bank of Greece SA, BNP Paribas, Commerzbank AG, Deutsche Bank,
Intesa Sanpaolo SpA, ING Groep NV, Allianz SE and Axa SA.
The 32 members of the IIF’s larger creditors’ committee
have already taken at least 24 billion euros in combined
writedowns on the country’s sovereign debt, and had at least 44
billion euros in residual holdings, according to data compiled
by Bg from their most recent reports.
Greece’s four largest banks are the country’s biggest
private creditors, with almost 29 billion euros of remaining
exposure to sovereign bonds, and have so far taken combined
losses of only 4.3 billion euros, according to their most recent
disclosures. National Bank of Greece, the nation’s biggest bank,
still holds 12.3 billion euros of the country’s sovereign debt.
The country’s lenders will have to be recapitalized with funds
from the bailout package earmarked for that purpose.

French Banks

Among foreign bondholders on the committee, the eight
French financial firms, which include BNP Paribas, CNP
Assurances SA and Groupama SA, have the biggest Greek sovereign
holdings. BNP Paribas, anticipating a debt restructuring, wrote
down its Greek bonds by 3.45 billion euros last year, or 75
percent. Societe Generale SA also booked writedowns covering
three-quarters of its Greek government debt.
Dexia SA, the Franco-Belgian lender being broken up after
requiring two bailouts in three years, reported 2.7 billion
euros of pretax losses on Greek sovereign debt by the end of
September.
German firms, including Deutsche Bank, Commerzbank and
Allianz, account for the second-largest residual foreign
exposure to Greece’s debt. Deutsche Bank marked down its Greek
holdings by 71 percent last year, booking 550 million euros in
pretax losses.