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Greece Moves to Make Investors Take Big Losses

ATHENS – Saved again by international lenders who agreed to a second bailout package, Greece has now told private investors it will pay most of them back only about 25 percent of what they are owed.  Greece on Friday launched its official offer for a massive bond swap designed to knock euro107 billion ($142 billion) off its debt held by banks and other private investors. The bond swap offer, in which investors will receive new bonds that pay them less interest and will let Greece have 30 years to do so, was negotiated as part of an agreement to keep the country from defaulting outright.
Finance Minister Evangelos Venizelos said he hoped that 90 percent of the investors would agree to take losses that could add up to 74 percent of what they are owed but that the others might not be forced to do so, although Greece was contemplating changing its laws to make the debt swap offer mandatory, which could have triggered a disorderly default. The complex deal was finalized after months of arduous negotiations between Greece and its bondholders that were complicated by European partners driving a hard bargain, hedge funds holding out for a default and pressure on public creditors like the European Central bank to chip in.
The head of the International Institute of Finance (IIF), a bank lobby group that negotiated on behalf of the private sector, expressed optimism that the exchange would attract high participation from investors. “We remain quite optimistic that once investors study this proposal … there will be high take up,” Charles Dallara, IIF Managing Ddirector, said at the G20 meeting in Mexico City. Banks, insurers and other investors holding about $277 billion of Greek government bonds will take a 53.5 percent loss in the face value of their securities, with actual losses estimated at 73 to 74 percent. Greece also agreed to let English law govern the arrangement, an unprecedented surrender of sovereignty, which was backed by Deputy Prime Minister Theodoros Pangalos.
The debt swap, also known as Private Sector Involvement, (PSI,) is designed to cut Athens’ debt load to 120.5 percent of its Gross Domestic Product by 2020 from 160 percent, in the hope that it would open the way for its eventual return to bond markets. Leaders of the Eurozone, the 17 countries that use the euro as a currency, hope it will keep Greece from defaulting and bringing down the rest of the financial block with it, although many analysts are still skeptical Greece can survive, despite a second bailout of $175 billion that goes along with a first for $152 billion that came with attached austerity measures that have created a deep recession now in its fifth year and led to protests, riots and strikes that seem set to continue.
“There is optimism in the government that there will be big participation in the swap,” a Greek government official said.  Greece said it was not obliged to carry out the swap unless it had 90 percent participation. If the participation was below 90 percent but above 75 percent, then Greece would consult with its public creditors.  If the rate was less than 75 percent and it did not receive required consents, it would not go through with the deal, it said.
Greece has passed legislation introducing so-called collective action clauses (CACs) that allow it to force all bondholders to proceed with the swap once it has secured a specified level of approval. Based on the recently approved law, the exchange will go ahead once 50 percent of bondholders have responded to the offer and the CACs will be activated once a two-thirds majority of that quorum has voted in favour of the swap. “In my discussions … no decision has been made on whether or not they will activate those collection action clauses,” Dallara said. “Should they decide to activate, of course it does raise concern, including other sovereign issues.” “If we do not implement that legislation, every speculator will be able to keep out of the process in the expectation of being paid in full,” Venizelos said. Greeks, living with 21 percent unemployment, big pay cuts, tax hikes, slashed pensions and with 150,000 firings in the public sector slated over the next few years, aren’t as fortunate and are being pressed by banks to pay back all they owe.
(Sources: Reuters, Kathimerini)

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