When the Greek government presents its debt relief proposal to bondholders in the next week, it could lead to one of the largest debt restructurings in history. It could also be the last one for a while, if European leaders have their way.
European officials want Greece to be seen as a special case, to assure global investors and lenders that other weak economies in the euro currency union will not eventually need their own debt write-downs. Otherwise, officials worry that fears of other debt renegotiations will prolong the sense of uncertainty and crisis that has plagued the euro zone financial system for nearly three years. If the majority of the Greek government’s private creditors accept the deal, 100 billion euros of debt (about $132 billion) will be struck from Athens’s pile of i.o.u.’s, which now total more than one and a half times the size of the Greek economy.
But if a large enough faction spurns the offer — a debt swap that would result in a nearly 70 percent loss for investors — the deal will fall apart.
That would jeopardize the 130 billion-euro bailout Athens hopes to receive from the European Union and the International Monetary Fund. And it would raise the prospect of default by Greece and could prompt its exit from the euro union — a departure whose regional consequences are hard to predict.
Euro zone finance ministers on Tuesday turned up the pressure on Greece to keep its budgetary promises, canceling a planned Wednesday meeting in Brussels and deciding instead to convene by teleconference.
Jean-Claude Juncker of Luxembourg, the chairman of the Eurogroup of euro zone finance ministers, said on Tuesday that the conference’s format had been changed because he was still waiting for assurances from Greek leaders about enacting budget cuts and other promised measures. Other technical work remains to be done before the next bailout can be released, Mr. Juncker said.
One unresolved issue is how the European Central Bank plans to handle its holdings of 55 billion euros in Greek bonds.
The working assumption is that the European bank, or possibly individual national central banks within the euro zone, might contribute to Greece’s debt relief by exchanging their current Greek bonds for new ones. Under that swap, the central bank or banks would forgo bond profits, but would not have any actual losses.
Complicating all this is the latest grim news on the Greek economy, which plunged 7 percent in the fourth quarter, according to data released Tuesday. That meant Greece’s economy shrank by 6.8 percent in 2011 — worse than the government’s previous estimate of 6 percent.
The new data is the latest sign that Greece may not be able to grow fast enough to pay down its debt, raising fears that even the latest terms won from investors will not be sufficient for its long-term recovery.
The final offer to Greece’s private creditors is expected to be a swap for bonds that have an interest rate of around 3.5 percent — down from the 4 percent or higher rate that investors originally demanded. Those bonds are expected to carry a “cash component” that actually would no longer be pure cash but, instead, involve less attractive short-term bonds issued by Europe’s bailout fund.
Through gritted teeth, most private creditors have said they are inclined to accept the offer.
They have little choice. Greece’s threat to attach so-called collective action clauses to the bonds they currently hold would force all investors to take a loss. Any holdouts on the deal would be stuck with nearly worthless bonds that offered no protection if Greece eventually needed to restructure its debt yet again.
“I think if there are no more changes, 75 to 80 percent of investors will participate,” said Hans Humes, president of Greylock Capital in New York, who is a member of the steering committee of the Institute of International Finance, the banking group that is representing bondholders in the talks.
But Mr. Humes warned that the number of potential holdouts had increased in the last few weeks, a response to the seeming take-it-or-leave-it attitude of the European leaders involved in the negotiations.
He also noted that he had been receiving calls from lawyers and bankers urging him to move from the conciliatory camp to the objecting group and fight the matter in court. He said he had declined those entreaties, on the grounds that such a strategy would be fruitless. But others, he said, might still be open to a legal fight.
“If you go too far on the coupon and fiddle too much with the cash component, it just won’t work,” he said. “The discontent on our side is growing.”
European officials want Greece to be seen as a special case, to assure global investors and lenders that other weak economies in the euro currency union will not eventually need their own debt write-downs. Otherwise, officials worry that fears of other debt renegotiations will prolong the sense of uncertainty and crisis that has plagued the euro zone financial system for nearly three years. If the majority of the Greek government’s private creditors accept the deal, 100 billion euros of debt (about $132 billion) will be struck from Athens’s pile of i.o.u.’s, which now total more than one and a half times the size of the Greek economy.
But if a large enough faction spurns the offer — a debt swap that would result in a nearly 70 percent loss for investors — the deal will fall apart.
That would jeopardize the 130 billion-euro bailout Athens hopes to receive from the European Union and the International Monetary Fund. And it would raise the prospect of default by Greece and could prompt its exit from the euro union — a departure whose regional consequences are hard to predict.
Euro zone finance ministers on Tuesday turned up the pressure on Greece to keep its budgetary promises, canceling a planned Wednesday meeting in Brussels and deciding instead to convene by teleconference.
Jean-Claude Juncker of Luxembourg, the chairman of the Eurogroup of euro zone finance ministers, said on Tuesday that the conference’s format had been changed because he was still waiting for assurances from Greek leaders about enacting budget cuts and other promised measures. Other technical work remains to be done before the next bailout can be released, Mr. Juncker said.
One unresolved issue is how the European Central Bank plans to handle its holdings of 55 billion euros in Greek bonds.
The working assumption is that the European bank, or possibly individual national central banks within the euro zone, might contribute to Greece’s debt relief by exchanging their current Greek bonds for new ones. Under that swap, the central bank or banks would forgo bond profits, but would not have any actual losses.
Complicating all this is the latest grim news on the Greek economy, which plunged 7 percent in the fourth quarter, according to data released Tuesday. That meant Greece’s economy shrank by 6.8 percent in 2011 — worse than the government’s previous estimate of 6 percent.
The new data is the latest sign that Greece may not be able to grow fast enough to pay down its debt, raising fears that even the latest terms won from investors will not be sufficient for its long-term recovery.
The final offer to Greece’s private creditors is expected to be a swap for bonds that have an interest rate of around 3.5 percent — down from the 4 percent or higher rate that investors originally demanded. Those bonds are expected to carry a “cash component” that actually would no longer be pure cash but, instead, involve less attractive short-term bonds issued by Europe’s bailout fund.
Through gritted teeth, most private creditors have said they are inclined to accept the offer.
They have little choice. Greece’s threat to attach so-called collective action clauses to the bonds they currently hold would force all investors to take a loss. Any holdouts on the deal would be stuck with nearly worthless bonds that offered no protection if Greece eventually needed to restructure its debt yet again.
“I think if there are no more changes, 75 to 80 percent of investors will participate,” said Hans Humes, president of Greylock Capital in New York, who is a member of the steering committee of the Institute of International Finance, the banking group that is representing bondholders in the talks.
But Mr. Humes warned that the number of potential holdouts had increased in the last few weeks, a response to the seeming take-it-or-leave-it attitude of the European leaders involved in the negotiations.
He also noted that he had been receiving calls from lawyers and bankers urging him to move from the conciliatory camp to the objecting group and fight the matter in court. He said he had declined those entreaties, on the grounds that such a strategy would be fruitless. But others, he said, might still be open to a legal fight.
“If you go too far on the coupon and fiddle too much with the cash component, it just won’t work,” he said. “The discontent on our side is growing.”
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