* Greece to pay 435 mln euro to holders of May 15 bond
* Finance minister had asked prime minister to decide
* Decision bound to irk creditors who took part in swap
By Renee Maltezou
ATHENS, May 15 Greece made a last-minute
about-face on Tuesday and paid bondholders who rejected an
earlier debt exchange, a move likely to upset creditors who
accepted just cents on the euro in a historic bond swap.
Greece opted to pay 435 million euros ($552 million) of a
May 15 bond to holders who had refused to exchange their debt,
despite insisting at the time of the offer in March that anyone
who rejected it would get nothing.
The decision averts litigation by the holdout bondholders at
a time when Greece is in deep political disarray after an
inconclusive election. But it will infuriate the 96.9 percent of
creditors, mainly European banks, who agreed to take the deal.
It also means hefty profits for hedge funds, who snapped up
distressed Greek debt at steep discounts and will now be paid in
full. Some Greeks may be angry at such a use for precious cash
at a time of severe cuts.
"It was a sensible thing to do, why let the country be
dragged to courts for just 430 million?" said a senior Greek
banker who did not want to be named.
A central bank official told Reuters the money was paid to
bondholders on Tuesday.
Not paying the May 15 bond could have triggered so-called
cross-default clauses, m eaning that holders of other bonds
governed by foreign law that were also not swapped could have
demanded immediate payment.
A government official who declined to be named told Reuters
about 4 billion euros out of a 6.4 billion euro pool of
remaining holdouts could have been subject to this cross-default
"Greece's strategy has been to openly say that it won't pay
holdouts, possibly in the hope at least some of them would go
away," said Steven Friel at legal firm Brown Rudnick, who
advises creditors holding other Greek bonds that were not
exchanged under the swap.
"This decision sets a commercial, if not a legal, precedent
that they are willing to meet their obligations to pay
bondholders in full for the other international law bonds that
will mature in coming years," he said.
However, the finance ministry said the decision to pay the
bond does not "prejudge future decisions regarding the treatment
of remaining bonds that were not offered for a swap".
The decision was taken by outgoing Prime Minister Lucas
Papademos, still in the job because an election on May 6 failed
to produce a government. Coalition talks collapsed on Tuesday
and a new election will be held next month.
A source in the outgoing ruling coalition said Papademos had
made the decision to pay the bond to keep options open, so that
a future government would have freedom to decide how to proceed.
"The next government can choose not to pay the following
bonds. But as we are now in an uncertain situation, he judged
that this one must be paid," the source said.
One drawback is that bondholders who agreed to the debt swap
and lost more than 70 per cent of their investment could seek
legal action if they see this as misrepresentation.
"We can see significant protests from those bondholders who
agreed to previous debt restructuring on the basis that Greece
said that there was no money available to do anything else,"
said James Campbell, a partner at global law firm Pillsbury.
A source close to private creditors involved in the swap,
who declined to be identified, called the decision to pay the
holdouts "scandalous" and wished Greece "good luck for the next
Greece completed the huge debt restructuring in early March,
swapping a nominal amount of 177 billion euros of government
paper held by private creditors for new securities as part of
its second rescue package.
Nearly all bondholders agreed to accept the loss after being
told they had no choice. A few held out, however, demanding to
be paid in full. That left about 6 billion worth of bonds that
the Greek government must now decide how to handle.
Hedge funds and specialist "vulture" funds that buy
distressed debt and try to win improved repayment terms have
snapped up Greek bonds in secondary markets over the last six
months. Many focused on foreign-law bonds where they could build
blocking stakes to stop Greece from activating so-called
collective action clauses, which impose losses on all holders.
For funds that bought the May 15 bond below par value,
Athens's decision to pay them in full at 100 cents looks to be
very profitable. The bonds were trading in the mid-60s cents on
the euro late last year and may have fallen much further this
year, according to a trader who follows the market.
Prices closed in the mid-80s on Monday, Thomson Reuters data
shows. However, it is difficult to know the exact prices at
which bonds would have changed hands because the secondary
market was illiquid and trading limited.