* Investors doubtful on deal
* Greek finance minister hails bond swap
* Government faces economic, political, social challenges
By Kirsten Donovan
LONDON, March 9 Greece may have negotiated
the biggest sovereign debt restructuring in history but early
prices on new bonds to be issued to creditors showed investors
had little faith that the deal would mean an end to Athens'
Under the deal, private creditors swap old Greek bonds for
new ones with a much lower face value, lower interest rates and
longer maturities, losing about 74 percent on the value of their
investments and slicing 100 billion euros off the national debt.
Greece's austerity and reform programme demanded by the IMF
and the EU means that its debt burden in 2020 should be
proportionately similar to that at the moment of Portugal.
This means yields on Greek and Portuguese bonds should be
similar, provided investors believe Athens will meet its debt
target. This was not the case on the "grey market", where
traders quote prices before a security is issued, with yields at
15-21 percent, far above Portuguese levels around 11-14 percent.
"One would expect the yields on the new Greek
bonds to be close to Portugal's levels, where the debt-to-GDP
ratio is about 116 percent," one international bond dealer said
"But ... the market is pricing a high risk premium, which
reflects uncertainty over upcoming elections in Greece and
reform implementation risk," the dealer added, saying yields
would probably remain around current levels for a few months.
Greece's Finance Minister Evangelos Venizelos hailed the
deal, which the nation's international lenders demanded in
return for the 130-billion-euro ($172 billion) bailout, as a
success for all Greeks who are enduring a long recession.
The European Union said the swap was a "decisive
contribution to financial stability in the euro area".
But Greece is a long way from solving its daunting economic,
political and social problems. Reforms demanded by the EU and
IMF alongside deep budget cuts provoked bloody street riots.
The country also faces elections in April or May when
pro-bailout conservatives and socialists face an array of
smaller parties to the left and right that reject the rescue,
and may struggle to form an effective government.
"RISK NOT OVER"
ING rate strategist Alessandro Giansanti said the prices on
Friday's grey market reflected around an 80 percent probability
of default although the bonds may go up in value in time.
"Everyone agrees the risk for Greece is still not over,"
Giansanti said. "But maybe the market will need some time to
adjust to the exchange."
Another trader, commenting on the yields, said: "That's
still showing that the market doesn't have faith that Greece is
able to pay its debts, even if you defer it for 20 or 30 years."
Greece will hand private creditors 20 new bonds as part of
the debt exchange to try and deal with its colossal debt.
Creditors tendered 85.8 percent of the 177 billion euros in
bonds regulated by Greek law. This will reach 95.7 percent of
all privately-held Greek debt once "collective action clauses"
are enacted to force the deal on creditors who refused to take
But Greece's target debt level of 120 percent of annual
economic output is still seen as unsustainable and analysts say
Athens may need another bailout as early as next year.
A February 2042 bond to be issued on Monday
was quoted with a yield of around 15 percent, while a February
2023 bond yielded nearer 20 percent, around 6.5
percentage points more than a comparable maturity Portuguese
Greek bond holders were widely assumed to be in line for a
74 percent loss on the value of their holdings in net present
value terms -- the real loss suffered by investors -- taking
into account factors such as future interest rates.
That would have equated to a yield of around 12 percent on
the new bonds. A 15 percent yield implies a loss of close to 76
percent, while a 20 percent yield equates to an almost 80
percent loss, Credit Agricole rate strategist Peter Chatwell
said, adding the initial pricing might be a knee-jerk reaction.
"The amount of holders of Greek bonds for speculative
reasons was probably quite elevated and it's not clear if they
would be long-term holders of the new bonds so it's perfectly
rational if we get a bout of selling followed by some
stabilisation," he said.