Deal or Default? Tension Rises as Greek Debt Swap Deadline Looms
Investors are nervous as the clock ticks down to the deadline for Greece's debt swap deal. The country's private-sector creditors have to decide by Thursday evening if they want to take part or not, and it is unclear whether enough will sign up. If the deal collapses, Athens will not receive vital new bailout funds -- making a default likely.
Stadiou Street was once the grand boulevard of Athens. But for some time now, its reputation has been suffering. Numerous demonstrations have recently proceeded along the street, paralyzing traffic. Often, clashes with police have ensued.
This week, too, Stadiou Street was the scene of unrest. This time there was trouble in the office building at number 24, where the Civil Servants' Auxiliary Pension Fund (Teady) has its headquarters. Angry unionists stormed a meeting room in the building on Tuesday -- at precisely the moment when the Teady board were supposed to decide whether the fund would participate in the debt swap deal for private-sector holders of Greek sovereign bonds. The meeting on Tuesday was interrupted, then Teady made a decision on Wednesday evening: They would not participate.
Teady is not alone with its "no." On Tuesday, five other public pension funds demonstratively voted against participating in the debt haircut. Greece's pension funds hold domestic government bonds worth a total of 20.4 billion (26.9 billion) -- about 5 percent of Greece's entire debt mountain. About two-thirds of that amount will be affected in any case by the debt haircut. For the rest, the funds have to give their consent -- and a number of them are opposing the move.
Outside of Greece, too, there are growing doubts about whether the debt swap will be a success. On Tuesday, the German DAX stock market index suffered its biggest daily loss of this year, falling by 3.4 percent, partly due to fears that the deal might collapse. Earlier, an internal document from the global banking association Institute of International Finance (IIF), which represented leading banks and investors in talks with Athens over the private-sector involvement, had become public. The document warned that a disorderly Greek default could result in costs of over 1 trillion.
On Tuesday evening, the CEO of the German state-owned development bank KfW, Ulrich Schröder, also warned that the debt swap could fail. The bank's experts, he said, had found increasing evidence that fewer creditors than expected would participate in the debt swap. That, he said, was the cause of the turbulence on the markets. "I would be happy if we were wrong," said Schröder.
According to the official plan, private-sector creditors such as banks and insurance companies should write off a total of 107 billion in Greek debt. To achieve this, they need to waive about half of the nominal value of their bonds, and swap the rest for new securities with longer maturities and lower interest rates.
The Greek government is aiming for a voluntary debt swap. Greece needs at least 90 percent of its private-sector creditors to agree to the swap by the deadline of 9 p.m. CET on Thursday for the deal to succeed.
EU Monetary Affairs Commissioner Olli Rehn expressed his optimism that the deal would go through. "According to our information, the debt swap should take place without a hitch since the operation is interesting financially for the private sector," Rehn said in an interview with France's Le Figaro newspaper.
'We Are Taking Part'
Indeed, many financial institutions have announced in recent days that they would participate in the debt swap. Following announcements by several major German banks, giant insurance companies Munich Re and Allianz also promised they would participate. "We are taking part," said a spokeswoman for Munich Re. The president of the German Savings Banks Association (DSGV), Heinrich Haasis, signaled broad support for the deal on the part of the association's members. "We are assuming that virtually all of them will participate," he said.
Six Greek insurance funds have already agreed to take part, including IKA, the insurance fund for private-sector employees. In addition, during a meeting with Finance Minister Evangelos Venizelos on Tuesday evening, six major Greek banks agreed to take part in the deal with all their Greek government bonds.
The problem is the following. Politicians were able to put pressure on major banks and insurers to participate in the debt haircut. In any case, many financial institutions had already largely written off the Greek bonds on their balance sheets, meaning they are not particularly affected by the debt swap.
But with other creditors, the participation is much more problematic. The Greek pension funds are a case in point. They now face a crucial test. They suddenly find themselves exposed to drastic losses totaling around 11 billion. Although there are vague plans for the funds to receive state-owned real estate assets in return, nobody currently knows what this will mean in concrete terms, or whether these properties are actually usable.
The pension funds are already suffering from dramatic drops in income as a result of wage cuts of up to 50 percent within the space of two years, skyrocketing unemployment and lower capital injections from the state budget. As a consequence, pensions have been reduced significantly. "We want to prevent a new crime at the expense of the insured," said union leader Costas Tsikrikas on Tuesday, justifying demonstrators' tough approach. University professor Theodore Paraskevopoulos spoke of a scandal. "The debt haircut is relieving the state of its obligation to pay pensions," he said.
As corporations under public law, the pension funds were forced to make a risky investment. They were obliged to carry out the informal instructions of the incumbent governments, namely that reserves could only be invested in Greek bonds. Now the funds fear the wrath of their members. And they are not alone in that fear. According to KfW CEO Schröder, many fund managers and asset managers outside Greece have also decided not to participate in the debt swap, out of concerns they could be sued by their clients.
Ruined by the State
There is also massive resistance among average wage earners in Greece who invested their savings in government bonds, which were seen as safe. The majority of them are expected to decline the debt swap offer. Private individuals hold about 3.2 billion in Greek government bonds. "This affects more than 11,000 people and their families," says Yiannis Tsolias of the association of private investors in Greek bonds. "Some people invested all their savings, which they earned above board. The government is ruining them."
The IIF said on Wednesday that just 40 percent of private-sector investors have signed up for the deal so far. If not enough investors sign up by the deadline on Thursday evening, then Greece will have to resort to Plan B. The voluntary debt swap would then be abandoned. Instead, creditors would be forced to participate through the retroactive introduction of so-called collective action clauses (CACs).
This solution would be far more problematic. The rating agencies have warned that if the CACs are triggered, then they will declare Athens to be in default. That would reduce Greek bonds to irrevocable junk status, making it even more unlikely that the country will be able to return to raising money on the markets any time in the foreseeable future. Last week, two of the big three ratings agencies, Moody's and Standard & Poor's, already declared Greece to be in selective default.
And it is by no means certain that even a compulsory debt swap would succeed. Although the Greek parliament has created a legal basis for the retroactive introduction of CACs, there are hurdles to those clauses being triggered. At least 50 percent of investors have to participate in a vote over a compulsory swap and two-thirds have to agree to it. It is completely unclear whether this condition could be fulfilled.
Even the two-thirds rule could be contested. Around 29 billion out of the around 206 billion worth of debt held by private-sector investors is not governed by Greek law, but by, for example, English or Japanese law. A 75 percent approval threshold applies on these bonds, making it easier for owners of these securities to put together blocking minorities. A number of hedge funds have supposedly been trying to do this for months, which would allow them to reject a debt swap. The result might be legal disputes that could go on for years.
If Athens' Plan B should also fail, then the country could be faced with a disorderly bankruptcy -- exactly the thing that the European Union and International Monetary Fund have been trying to prevent for the last two years. The EU and IMF have made a successful private-sector debt swap a condition of releasing the second bailout for Greece, which was agreed upon at a Euro Group meeting in February and is worth 130 billion. If the haircut does not happen, then Greece would default on March 20, when 14.5 billion in loans mature.
It's safe to say that the tension will not abate as the clock ticks down to the Thursday evening deadline. The Greek government will announce the results at 7 a.m. CET on Friday.
© SPIEGEL ONLINE 2012
All Rights Reserved
Reproduction only allowed with the permission of SPIEGELnet GmbH