Greece green lights €206bn debt swap

Ministry of Finance secures cooperation of 86 per cent of Greek law and 69 per cent of foreign law b

A woman walks by a wall adorned with graffiti in Athens
A woman walks by a wall adorned with graffiti in Athens. Credit: Getty Images

 

The Greek Ministry of Finance annouced this morning that it has successfully secured the consent of the holders of €152bn worth of the country's private debt to go ahead with a debt restructuring plan. Under the terms of the deal each investor will receive 15 cents in cash, and 31.5 cents in new bonds, for every euro of debt they hold.

The investors who consented to the restructuring held, in total, just under 86 per cent of the debt Greece had issued under Greek law. This take-up was high enough to trigger a collective action clause, inserted into the bonds after they were issued, which forced a further 10 per cent of bond holders to participate.

The fact that the collective action clause has been invoked means that the restructuring is likely to be deemed a "credit event"; in effect, an official acknowledgement that Greece has partially defaulted.

This will come as a relief to investors holding a form of insurance called a credit default swap (CDS). These are bets against a Greek default, which investors buy if they want to limit the amount of money they would lose if a country reneges on its debts. The problem CDS holders had was that if all participation in the restructuring was "voluntary", their insurance wouldn't pay out, despite Greece still defaulting in all but name.

This would have posed a problem for the market in CDSs other countries, as well. If the Greek default wasn't declared a default, who could be certain that an Italian, Spanish, or Irish default would be if the time came?

As well as the bonds issued under Greek law, most of the rest of the countries debt involves bonds issued under foreign, largely English, law. The government was forced to issue such debt to reassure investors that the terms of investment would not change. The country is still negotiating with the holders of these foreign law bonds to secure a restructuring, but has announced that it has already gained the consent of just over two thirds of the bondholders, holding a total of €20bn of debt.

Since it has no option to force the remaining bondholders to accept the offer, the Greek government faces the much starker choice of either paying the holdouts in full, or defaulting on their debt. Choosing the latter option would expose them to lawsuits from the affected parties, an issue Argentina is still dealing with over a decade after their default.

Since many of the remaining holdouts are hedge funds which bought the debt when it was already well on the route to default, there will be little sympathy for them. But Greece will have to deal with them one way or another to secure its reported target of a 95 per cent uptake in the restructuring.