Greek Debt Is Restructured in Deal With Lenders

TheNewYorkTimes: LONDON — Greece said Friday that it had clinched a landmark debt restructuring deal with its private sector lenders. The deal clears the way for the release of bailout funds from Europe and the International Monetary Fund that will save the country from imminent default.

The Greek finance ministry said that 85.8 percent of private creditors holding 177 billion euros in Greek bonds participated in the bond swap. After invoking collective action clauses, provisions that will force the holdouts to accept the offer, the participation rate would rise to 95 percent and meet the target set by Europe and the I.M.F. for the release of crucial rescue funds.

 

The ministry also said that 69 percent of investors holding a category of Greek bonds issued under laws other than Greek law had agreed to the exchange — or about €20 billion worth. This figure is much higher than anticipated because many of these investors were expected to either challenge Greece in court or hold out for better terms.

 

Greece said it would extend the invitation period for these foreign law bond holders to March 23. Ramping up the pressure on these investors, Greek finance minister Evangelos Venizelos said that after this date, the offer to foreign law bond holders to participate in the bond swap would be withdrawn.

 

For Greece, the better than expected numbers highlights the success of the aggressive legal strategy to force bond holders to take up the exchange even though they would accept a big loss in the process. Seen at first as a risky gambit that could end up badly, the take-it-or-leave-it approach — mixed in with tough rhetoric from public officials in Greece and Europe — proved to be highly effective as it forced even the most reluctant investors to tender their bonds.

 

“I wish to express my appreciation to all of our creditors who have supported our ambitious program of reform and adjustment and who have shared the sacrifices of the Greek people in this historic endeavor,” Mr. Venizelos said.

 

The participation rate is a level that few would have predicted weeks ago. Greece will still need to impose so-called collective action clauses, but to pull that trigger with nearly 86 percent will put Greece in a much better position legally if some investors challenge the swap.

 

The International Swaps and Derivatives Association, the global body that oversees the credit default market, said it will meet at 1 p.m. London time to discuss whether the use of this amendment to force investors to take part in the exchange constitutes a credit event — one that would result in an estimated 3 billion euros in claims being paid out to investors.

 

Market analysts have long expected that the use the use of collective action clauses would mean that credit default swaps — insurance like payments that are paid when a country defaults — would be triggered.

 

Still, the relatively low sum and the fact that such a scenario has been widely expected suggests that any such judgment will be treated with relative equanimity by investors.

 

Petros Christodoulou, the head of Greece’s debt management agency, had told wavering bondholders that there will be no sweetheart deals for holdouts. “We know what money we have and we know what money we don’t have,” he said during a recent interview. “My blood curdles to think what happens if this deal does not get done.”

 

The Institute of International Finance, the global banking body that has represented private bondholders in the discussion, circulated a confidential memorandum to European leaders recently estimating that a disorderly default by Greece, which could result in the nation’s departure from the 17-nation euro monetary union, could result in losses to banks, corporations and governments of as much as a trillion euros.

 

Although many considered the memo a scare tactic, it nevertheless seemed to have had an effect on some of the potential holdouts. When the alternative was put in such stark terms, many investors evidently concluded it would be better to accept the swap — giving them a package of foreign-law Greek bonds, as well as securities from Europe’s financial rescue fund — than to end up with nearly worthless bonds subject to Greek law.

 

The value of Greek 10-year bonds recently hit a record low of 16 cents on the euro.

 

“This is the best offer they can make to investors,” said Ioannis Sokos, a bond analyst at BNP Paribas. “Because at the end of the day Greece has no cash.”

 

Still, many foreign investors say they believe that even with a successful debt swap, the Greek debt burden will remain untenable — well above the 120 percent of Greece’s gross domestic product that the I.M.F. considers the highest sustainable level. And with the Greek economy still in free fall and the makeup of the next government uncertain, many analysts contend that Athens may have to restructure its debt yet again within a year or so.

 

The successful swap deal will leave much of Greece’s debt in the hands of official lenders like the European Central Bank and the I.M.F. Those institutions might ultimately face large losses themselves if Greece cannot find a way to manage its finances without further bailouts.

 

Legal analysts contend that the Greek government’s recent strategy of bluntly emphasizing the cost of not participating in the swap deal has been a significant factor behind its coming together so quickly.

 

“What is remarkable is the speed with which this has been executed — that is unprecedented,” said Michael Waibel, an expert on sovereign debt law at Cambridge. “And this very well may have been done by design.”

By LANDON THOMAS Jr.