Greece sees finish line in race to slice debt

[March 09, 2012]  ATHENS, Greece (AP) -- Greece's race to slice euro107 billion ($140 billion) off its national debt entered the final stretch Thursday, with markets confident enough investors will accept to write down more than half of the value of their Greek bond holdings.

If too few investors agree and the swap 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.

But markets appeared optimistic that Greece would muster enough support. Greece's stock exchange was up 1.4 percent, while the Stoxx 50 of leading European shares rose 1.2 percent. The euro was trading 0.7 percent higher at $1.322.

Athens is asking private creditors to swap their Greek bonds for new ones with a 53.5 percent lower face value, lower interest rates and longer maturity dates.

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.

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

By early Thursday, banks, pension funds and other investors holding more than half the euro206 billion ($270 billion) total debt in public hands had pledged to take part. New legislation will allow Greece to force holdouts into accepting the deal if overall participation is not high enough.

Investors have until 10 p.m. local time (2000 GMT) to sign up. Only bonds held by private investors are part of the deal, meaning that outstanding amounts held by the European Central Bank and other central banks are exempt. Athens will announce the results early Friday morning, after which finance ministers of European countries using the euro are to discuss the outcome in a conference call.

"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 nothing is close to what bondholders would recover," 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."

The complex bond swap, known as the Private Sector Involvement, or PSI, is critical for Greece to secure its second bailout -- a euro130 billion ($171 billion) package of rescue loans from other eurozone countries and the International Monetary Fund. Without the funds, Greece faces a potentially messy default that could drag down other financially vulnerable countries in Europe and threaten the joint currency itself.

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

The Institute of International Finance, which has been leading the debt talks for large private creditors, said 32 firms holding euro84 billion ($111 billion) of Greek bonds have agreed to the deal, including major German, French, Greek and Cypriot banks. German reinsurer Munich Re, which holds some euro1.6 billion ($2.1 billion) in Greek bonds, also said it will participate.

On top of that, some euro17.5 billion ($23 billion) in bonds owned by Greek social security funds but managed by the central bank will also be part of the swap. Eight Greek social security or pension funds holding euro3.2 billion in bonds have signed up to the deal, while another six, who hold euro3.4 billion, have voted against. The holdouts include funds for journalists, police, lawyers, doctors and civil engineers.

Some other creditors, notably hedge funds, are also expected to hold out, hoping that Greece will prefer to repay them in full if they don't make up a big amount of bonds or because they expect to profit from payouts of so-called credit default swaps linked to Greek bonds.

CDS are complex financial products, in which the CDS seller pays the CDS holder in case of default of some underlying assets, such as a government bond. Initially created as a type of bond insurance, CDS have also been used by speculators who do not own the underlying asset but hope to profit from a default nevertheless.

Eurozone leaders and the European Central Bank wanted the Greek bond swap to be entirely voluntary to avoid a CDS payout, which they fear could create a cascade of losses in an already shaky financial system.

Now that it looks as if the deal will be forced on at least some bondholders, a payout of CDS looks very likely, though concerns about the impact have eased noticeably.

The International Securities and Derivatives Association, the organization overseeing CDS, says the actual payouts on CDS's linked to Greek bonds will be less than $3.2 billion.

The president of the German Banking Association, Andreas Schmitz, said he doesn't expect the bond swap -- even if it results in a CDS payout -- to cause turmoil on financial markets.

"The consequences won't hit the market as hard as many thought even a short while ago," Schmitz said Thursday. "I think that the market today will react quite rationally."

However, Schmitz said the debt relief won't mean the end of Greece's troubles, warning that the country may have difficulty in the longer term to repay the remainder of its debt, including some rescue loans.

[Associated Press; By ELENA BECATOROS]

Nicholas Paphitis in Athens and Gabriele Steinhauser in Brussels contributed.

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