Greece wins debt swap backing for bailout
Greece is successful in offering a bond swap to private creditors, after the deadline expired on a deal needed to avoid a debt default.
The biggest sovereign debt restructing in history will see bond holders accept losses of around 74 per cent on the value of their investments in a deal that will cut more than 100 billion euros from Greece’s crippling public debt.
But Channel 4 News Business Producer Ben King says it is a postponement, not an end, to the crisis.
A government official told Reuters that the take-up on the offer was around 95 per cent an hour before the offer closed at 2000 GMT on Wednesday, with responses still coming in. After initial fears that the deal could fail, leaving Greece and the euro zone facing a continuing crisis, the result is unexpectedly positive for Greece.
The private sector involvement deal is a key element in a broader international bailout aimed at averting a chaotic default by Greece and a potentially disastrous banking crisis across the euro zone. The EU and the International Monetary Fund (IMF) made a succesful bond swap a pre-condition for final approval of the 130 billion euros bailout agreed last month.
“The markets will now eagerly await a decision on whether this deal – which is a default in all but name – will trigger the insurance investors have taken out to protect themselves against losses on Greek debt.”
For Greece, a brief moment of triumph. Failure to secure agreement from the majority of its creditors yesterday would have pushed the country into a sudden, disorderly default, with damaging consequences for the eurozone and catastrophic consequences for the Hellenic Republic itself, writes Channel 4 News Business Producer Ben King.
But the moment of crisis has only been postponed, possibly only until lunchtime. The markets will now eagerly await a decision on whether this deal – which is a default in all but name – will trigger the insurance investors have taken out to protect themselves against losses on Greek debt.
Eyes turn to an obscure industry group – the International Swaps and Derivatives Association – and its even more obscure EMEA Determinations Committee. It meets on Friday lunchtime to decide whether yesterday’s debt deal constitutes what is known in the jargon as a ‘credit event’, which would trigger payouts on the insurance contracts known as credit default swaps. If it does, then holders of those swaps can claim their losses from the people who issued those credit default swap contracts. The trouble is that nobody knows how many were issued or who issued them.
They could be many multiples of the value of the debts themselves, as perversely it is possible to take out insurance even if you don’t hold the underlying debt. This wave of uncertainty would be highly damaging. However, if the committee says losing 75 per cent of your money isn’t a credit event, then what is?
Investors who are relying on credit default swap insurance to protect them against losses on Spanish and Italian loans may well conclude that their insurance doesn’t seem to pay out, it is worthless, creating a different source of dangerous uncertainty.
On the plus side, Europe’s banks are looking stronger than they have for years, buoyed by a river of cheap short term loans from the European Central Bank.
This has led some European leaders to hint that the worst of the crisis is over – Commission President Jose Manuel Barroso and French President Nicolas Sarkozy among them. But for Greece itself, this modest success buys little more than time. When the international bailout is concluded, its debts will still be more than 120 per cent of national income.
That would be onerous for a country enjoying rapid growth, but Greece is the opposite of that. Its economy has been shrinking for the past four years under a crushing burden of austerity, and it shows little sign of returning to growth anytime soon. The debts look unpayable, another bailout or default seems inevitable. But for now, Europe breathes a sigh of relief.
Speaking to PBS television, the managing director of the IMF, Christine Lagarde, said: “As we speak, it looks like it’s going through and it looks as if the numbers will be promising.”
“If all goes well..we will be able to announce that a debt burden of 105 billion euros has been lifted from the Greek people,” the finance minister Evangelos Venizelos told Parliament. “For the first time we are cutting debt instead of adding to it.”