DONE DEAL: 85.8% Sign Up For Greek Debt Swap, 95.7% After Triggering CACs

AP

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ATHENS, Greece (AP) — Greece on Friday announced that it had managed to convince a high proportion of its private creditors to accept steep losses on their bonds, staving off an imminent default and paving the way for the release of funds from international rescue loans.

 
The Finance Ministry said 85.8 percent of private investors holding its Greek-law bonds had signed up to the deal, and that it aimed to use legislation forcing the remaining holdouts to participate. It extended the deadline for holders of foreign-law bonds, of whom 69 percent have so far signed up, until March 23.

The deal aimed to slash the country's national debt by euro107 billion ($140 billion), with private bond holders accepting a face-value loss of 53.5 percent in exchange for new bonds with more favorable repayment terms. A total of euro206 billion out of Greece's euro368 billion national debt is in private hands.
If the swap had failed, Greece would have faced defaulting on its debts in two weeks, when it faced a large bond redemption.

Government spokesman Pantelis Kapsis told The Associated Press the participation level as being "very satisfactory, and has exceeded our expectations."

The deal "is a historic agreement for Greece, which allows us relief from a very significant part of our debt, and I believe it opens the way for completion of the loan agreement and for us to turn a new page," he said.
In total, the Finance Ministry said holders of euro172 billion in Greek- and foreign-law bonds had agreed to sign up to the deal — translating in to an 83.49 percent overall participation level. By triggering the legislation known as collective action clauses to force holdouts to join, they will reach a participation level of 95.7 percent, or euro197 billion.

"The very strong and positive result provides a major opportunity now for Greece to move ahead with its economic reform program, while strengthening the euro area's ability to create an economic environment of stability and growth," said Josef Ackermann, chairman of the International Institute of Finance, which had negotiated in the deal on behalf or large private creditors.
Asian stock markets rose earlier in the day, following reports overnight that participation would be high enough to seal the deal.
Japan's Nikkei 225 index closed up 1.7 percent to 9,929.74, its highest finish in more than seven months. It briefly surged past 10,000 for the first time since Aug. 1 amid market optimism that a fix to Greece's immediate debt was at hand.

The bond swap is a radical attempt to 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.
"I personally had expected a slightly lower acceptance level, but 85.8 percent is very, very good," said Michael Kemmer, the head of the Association of German Banks,
For the banking sector, "it is painful, but this shows that everyone is doing justice to his responsibility here," Kemmer said on Deutschlandfunk radio. "So it is good news, and isn't very surprising."
However, he stressed that "for all the justified happiness about this, in the end Greece has only bought time again, and there is no getting around them finally doing their homework, tackling budget consolidation, seeing through their austerity programs and tackling privatization."
A debt crisis sparked by years of overspending and waste has left Greece relying on funds from international bailout loans since May 2010. The austerity measures including salary and pension cuts and tax hikes imposed in return have led to record unemployment and a deep recession, but its politicians came under criticism for dragging their heels in implementing reforms.
"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," Finance Minister Evangelos Venizelos said. "With the support of our official sector and private creditors, Greece will continue implementing the measures needed to achieve the fiscal adjustments and structural reforms to which it has committed, and that will return Greece to a path of sustainable growth."
Venizelos was to hold a news conference later Friday, ahead of a conference call between the finance ministers of the 17 European Union countries that use the euro to discuss the deal's results.
The International Swaps and Derivatives Association said it would also meet later Friday to determine whether the deal would be deemed a so-called "credit event" — a technical default — which would trigger the payment of credit default swaps, which is essentially insurance against a default.
When the debt relief plan was first announced last year, eurozone leaders and the ECB worked hard to avoid a credit event, because they feared the a payout of CDS could destabilize big financial institutions that sold them.
However, since then a CDS payout has started to look less threatening. The ISDA, a private organization that decides on credit events, said that if triggered, overall payouts on CDS linked to Greece will be below $3.2 billion. That amount is spread over many financial firms and likely too small to significantly hurt any one of them.
The bond swap deal is an essential part of Greece's second international bailout, and the country now hopes to start receiving funds from the euro130 billion package of rescue loans from other eurozone countries and the International Monetary Fund. The IMF has set a tentative board meeting date of March 15 to discuss the size of its participation in Greece's second bailout.

DON'T BE FOOLED: This Greek Debt Deal Is Doomed Even If 'Agreement' Is Reached

Simone Foxman

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There's been some excitement in the air about the fact that the Greek government and representatives of the banking sector are reportedly nearing an agreement on the terms of a deal to restructure the countries debt as part of a controlled default.
But don't be fooled: this deal is doomed.
In fact, the consequences of the deal actually going through would probably be far worse than a dreaded credit event—something EU leaders are desperately trying to avoid.
Back in July, Greece's creditors were told they would take losses of about 21% on their holdings of Greek bonds as part of an orderly Greek default. At the time, Greece asked for a minimum of 90% participation in the bond swap and it looked probable that they would get something close to but still beneath that.
Fast forward to October, and the terms of the deal were drastically changed. Now Greece and representatives of the banking sector determined that banks would take haircuts of about 50%. Negotiations about the terms of that deal are the talks that are drawing to a close right now.
The problem is that Greece's creditors have to participate "voluntarily" in order for this restructuring not to provoke a credit event, which would induce a payout of credit default swaps—insurance contracts that hedge against the possibility of a Greek default. This contingency could have far-reaching effects, because the CDS industry is relatively opaque.
Regardless of what representatives of Greece's creditors—led by Institute of International Finance managing director Charles Dallara—might agree to, however, banks and hedge funds that actually hold Greek bonds and have hedged against the possibility of a Greek default are not going to accept massive losses without receiving the insurance they feel due.

So EU officials have a choice: either accept the inevitability of a credit event and potentially face losses in the public sector (the European Central Bank holds about €40 billion in Greek bonds) or skirt the rules with a high-handed maneuver that would coerce all creditors to swap their debt holdings "voluntarily."

That latter choice—likely the fallout of the "agreement" creditors and the Greek government—would probably be far worse than the implementation of a deal. Not only would it completely undermine the credibility of EU leaders, it would destroy the massive European CDS industry because it would become nearly impossible for financial institutions to fully hedge against the possibility of any sovereign default.
There are two best case scenarios right now: the ECB joins in the Greek debt restructuring, inspiring confidence that the public sector will accept part of the burden for its participation in the Greek crisis and reducing the losses creditors take, or EU leaders accept the inevitability of a disorderly Greek default and let it happen.

While the latter possibility is a little frightening, the Greek CDS industry is relatively small—$74 billion net and $4 billion gross according to Citi's Willem Buiter. Further, it would likely make Greek debt more sustainable by forcing creditors to take bigger haircuts. Under the current deal, there's little hope that Greece will return to sustainability anytime soon.

But perhaps most importantly, this would preserve investor confidence in EU leaders' willingness to play by the rules. If EU leaders pull some high-handed flourish right now to force losses on Greece's creditors, who's to say they won't do the same thing in the future with Portugal, Italy, Spain, Ireland, or even the European bailout fund?
Bottom line: don't be excited about these "agreement" headlines. This deal is not what EU leaders would have you believe.