Greek bond swap falling short, governments may fill gap: sources

Reuters News
Posted: Jan 11, 2012 5:48 PM
Greek bond swap falling short, governments may fill gap: sources

By Edward Taylor and Philipp Halstrick

FRANKFURT (Reuters) - Talks about private sector creditors paying for part of a second Greek bailout are going badly, senior European bankers said on Wednesday, raising the prospect that euro zone governments will have to increase their contribution to the aid package.

"Governments are mulling an increase of their share of the burden," said one of the bankers, who is familiar with the talks.

An IMF source told Reuters if the deal with private bondholders does not help reduce Greece's debt, then Europeans would have to provide more financing for the next rescue package or the IMF may be unwilling to commit more money for Athens.

Banks and investment funds have been negotiating with Athens for months on a bond swap scheme to cut Greece's debt burden from 160 percent of the nation's annual output to a more manageable 120 percent by 2020. This is central to a second, 130 billion euro ($165 billion) bailout that international lenders have drawn up to help the country avert default.

As part of these talks, banks have agreed to a "voluntary" 50 percent write-down on Greek debt holdings but have faced demands to make further concessions, a factor that has made it less attractive for some of the investors to take part on a voluntary basis.

The participation rate among private sector investors is currently less than 75 percent, which means Greece's debt will be reduced by far less than expected, the source said.

Asked whether governments will have to put up more cash to make up for such a shortfall, another senior banker said: "Nothing is decided yet, but the bigger the imposed haircut, the less appetite there is for voluntary conversion."

A third senior banker, who was asked the same question, said: "Private sector involvement is going badly."

There are suggestions in euro zone government circles that ministers are realizing they may need to bolster the planned second bailout if the voluntary bond swap scheme falls short of expectations.

Stumping up yet more money would be politically difficult in Germany and other countries in the northern part of the currency bloc.

An Athens-based source close to the talks on private sector involvement (PSI) insisted: "The government is pushing hard and is close to signing a deal." But the source declined to give an indication about take-up.

German newspaper Handelsblatt said in a preview of a story to be published on Thursday that according to IMF calculations, there was a hole in the "significant tens of billions" in the Greek aid package that would have to be plugged.


On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy insisted private-sector bondholders must share in reducing Greece's debt burden and said no further aid would flow to Athens without a deal.

Banks and other private sector creditors attempted to agree a deal before Christmas to cut the value of their bonds by half in return for a mix of cash and new bonds.

But the talks hit trouble over the details of the debt swap such as the coupon, maturity and the credit guarantees. These will determine the bonds' Net Present Value (NPV), and thereby the actual hit the banks need to take.

Policymakers insist agreement is near despite weeks of talks already. EU Economic and Monetary Affairs Commissioner Olli Rehn said on Tuesday negotiators were "about to finalize shortly".

Athens needs to conclude the deal and secure funding from its euro zone partners and the International Monetary Fund to be able to redeem 14.5 billion euros of maturing bonds on March 20. [ID:nL6E8CA3I3]. A deal needs to come well before that, because the paperwork alone takes at least six weeks.

Hedge funds who have picked up Greek debt are intent on staying out of the bond swap deal, sources say. They either prefer letting the country go under, which would trigger the credit insurance they have bought, or hope to get paid out in full if enough others sign up.

But Athens could change its laws and impose Collective Action Clauses which would force all creditors to sign up to the bond swap if a clear majority had voluntarily done so.

Charles Dallara, the head of a group representing private-sector banks, will hold talks in Athens on Thursday with Greek government officials on a voluntary swap of privately held Greek bonds, a spokesman for Dallara's Institute of International Finance said.

According to a weekend report in German magazine Der Spiegel, the IMF believes Greece will still be sinking under the burden of its debts even after a bond swap deal is struck, and that further measures may need to be taken if the country is to avoid default.

(Reporting by Edward Taylor and Philipp Halstrick,; additional reporting by Dina Kyriakidou in Athens and Lesley Wroughton in Washington; writing by Mike Peacock; Editing by Ruth Pitchford and Andrew Hay)