Greece on verge of historic debt swap deal

Greece has moved closer to wrapping up its bond swap with private investors, indicating that it had already cleared a vital threshold needed to pass a deal which will hand bondholders steep cuts in the value of their investments.

With less than three hours to go on a deadline on the biggest sovereign debt restructuring in history, a senior official on Thursday said the government had acceptances covering more than 75 per cent of bonds eligible to take part in the offer.

Investors have until 20:00 GMT to sign on to the deal, which aims to lower Greece’s national debt by having private creditors swap their Greek bonds for new ones with a face value that is 53.5 lower than previously, lower interest rates and longer maturity dates.

The swap is a critical part of the country’s second international bailout.

Unexpected ‘success’

If too few investors agree and the initiative fails, the crisis-hit country will likely default on its debt in less than two weeks when a big bond repayment is due, prompting renewed turmoil in financial markets and knocking confidence in the global economy.

Al Jazeera’s John Psaropoulos, reporting from Athens, said that a senior official told him on Thursday that participation in the debt deal may have surpassed 80 per cent. 

“If so, that will be a higher than expected success for the Greek government, which still has two hours to go before the deadline,” Psaropoulos said.

He added that there was an “enormous” amount of global interest in the situation in Greece.

“There is interest from as far afield as China, with many countries in live communication now with sources in Greece. If the debt deal fails, it could, according to some economists, drive the whole European economy into recession,” Psaropoulos reported.

Athens has said it needs 90 per cent participation for the deal to be successful. However, it can trigger legislation forcing holdouts to go along if creditors holding between 75 per cent and 90 per cent sign up.

Markets have been optimistic that Greece will muster enough support. The Athens stock exchange closed up 3.1 per cent, while the Stoxx-50 of leading European shares rose 0.9 per cent. The euro was trading 0.8 per cent higher at
$1.32.

The bond swap is a radical attempt to finally pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing the overall debt, the country, which is in a fifth year of recession, can gradually return to growth and eventually repay the remaining money it owes.

Second bailout

The task at hand, even with the debt reduction, is massive. Official figures released on Thursday showed unemployment shot up to a record 21 per cent in December, compared with 14.8 per cent last year. For young people, the figures are even worse, with 51.1 per cent of those aged between 15 and 24 out of work.

“Obviously for the majority of bondholders it does make sense to accept the deal as it is better to get something rather than nothing and if the exchange failed and Greece undertook a disorderly default then the likelihood is that … bondholders would recover [next to nothing],” said Gary Jenkins, managing director of Swordfish Research.

“Thus the most likely outcome remains that Greece will receive enough acceptances to move ahead with the deal and trigger the second bailout package.”

By early Thursday, banks, pension funds and other investors holding well over half the $270bn total debt in public hands had pledged to take part.

Italy’s Premier Mario Monti was upbeat. “The resolution of the Greek financial crisis is in sight,” he said earlier on Thursday afternoon.

‘Going well’

Only bonds held by private investors are part of the deal, meaning outstanding amounts held by the European Central Bank and other central banks are exempt. Athens will announce the results early on Friday, after which finance ministers of European countries using the euro are to discuss the outcome in a conference call.

Lucas Papademos, the Greek prime minister, held a Cabinet meeting on Thursday afternoon to discuss the plan. Evangelos Venizelos, the country’s finance minister, informed the ministers that the process had been “going well”, an official in the meeting said.

The complex bond swap, known as the Private Sector Involvement, or PSI, is critical for Greece to secure its second bailout, a $171bn package of rescue loans from other eurozone countries and the International Monetary Fund.

The Institute of International Finance, which has been negotiating on behalf of large private creditors, said 32 firms holding $111bn of Greek bonds have signed up, including major German, French, Greek and Cypriot banks.