May 15, 2012 / 12:39 PM / 8 years ago

In about-face, Greece pays bond swap holdouts

ATHENS (Reuters) - 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, meaning 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 trigger.

“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 restructuring”.

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.

Additional reporting by George Georgiopoulos, Lefteris Papadimas, Sophie Sassard and Tommy Wilkes; Writing by George Georgiopoulos; Editing by Peter Graff and Giles Elgood

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