Greek bondholders set for 74 percent loss

LONDON/FRANKFURT Tue Feb 21, 2012 11:39am EST

A man walks at the reception hall of the Athens Stock Exchange February 20, 2012. REUTERS/Yiorgos Karahalis

A man walks at the reception hall of the Athens Stock Exchange February 20, 2012.

Credit: Reuters/Yiorgos Karahalis

LONDON/FRANKFURT (Reuters) - Banks are set to lose almost three-quarters of the value of their Greek government bonds under a deal agreed early on Tuesday, people familiar with the matter said, although enough are expected to agree to the write-off for it to scrape through.

Investors had previously expected to suffer a 70 percent hit, so now face an extra collective loss of up to 8 billion euros (6.7 billion pounds). The big bondholders include the likes of BNP Paribas, insurer Allianz and hedge fund Greylock.

Commentators expected to see the private sector squeezed more as politicians struggled to fill Greece's funding gap, since a full default could have seen them left with nothing.

"Both parties knew that the ultimate recovery for private sector investors is potentially zero," said Gary Jenkins, analyst at Swordfish Research.

Euro zone finance ministers sealed the 130-billion-euro bailout for Greece after another marathon session, saying the plan would cut debt to 120.5 percent of gross domestic product by 2020.

The debt reduction plan is based on optimistic assumptions, however, and many investors and analysts said more was needed to drag the country out of a deep economic slump.

"I don't think the deal puts them on a sustainable footing, it buys them a few more years," said Patrick Armstrong, fund manager at Armstrong Investment Managers. "If everything goes perfectly, maybe that might happen, but Greece has some real structural issues to overcome - even if they did see growth, they are not set up logistically to collect taxes."

Under the deal, private investors will swap their existing debt into new bonds with a maturity of up to 30 years.

The deal will write off 107 billion euros of debt, and interest payments will be just 2 percent for the first three years, and average 3.65 percent over the 30 years.

NEW LAWS

The new bonds will be launched in the next week, and Greece said it would pass legislation to enforce losses on bondholders who balk at the new terms.

Private sector creditors agreed to increase their nominal loss on the bonds to 53.5 percent, but said only that the net present value (NPV) loss would be over 70 percent. The NPV loss is the real loss suffered by investors, taking into account factors such as future interest rates.

Two people familiar with the matter said the NPV loss for private sector investors would be 73 to 74 percent, while a third said it would be 74 percent.

Bondholders have pledged "strong participation" in the deal, and past restructurings of sovereign debt - such as in Argentina, Ecuador and Uruguay - show that the take-up rates in such deals are normally well over 90 percent.

The bond swap has now been agreed in principle with the Institute of International Finance, under the leadership of Charles Dallara, but the banks now have to sign the documents and the final take-up of the deal is still unclear.

SQUEEZE-OUT

Hedge funds in particular are positioning to profit from the plan to slash Greece's debt pile, with many of them having piled into bonds while at the same time buying credit default swaps, which pay out if a lender defaults.

Holders of these swaps will be hoping Greece forces any bondholders into the deal who do not take part voluntarily through so-called Collective Action Clauses (CACs).

Deploying the CACs would almost certainly trigger a CDS pay-out, as initial fears among policymakers that this could trigger a Lehman Brothers-style market collapse have now waned.

"Any holders who have a CDS against their position will want that triggered," said Armstrong. "So I would say (the take-up rate) won't be 90 (percent), but it will be enough ... they will pass the required threshold to push the rest of the tail into it."

In markets, relief that a deal was reached was offset by concern it sets a template if other countries, such as Portugal or Italy, hit trouble. By 1521 GMT the European bank shares index was down 1.0 percent.

A disorderly default in Greece - in which it would not have had enough money to refinance a 14.5 billion euro bond maturing in March - could have seen the private sector left with no value at all, so there was little room for them to bargain.

"Those investors that are short Greek debt will make money, the legal power of the state means the authorities suffer no damage, while the private sector will suffer losses," said Richard Woolnough, a fund manager at M&G.

"The locusts will feed well, the authorities will not eat less, and the private investor will waste away."

(Additional reporting by Douwe Miedema and Sinead Cruise in London, and John O'Donnell in Brussels, Editing by Douwe Miedema and Jodie Ginsberg)