How does Greece’s debt swap work?
Bailout to include private bondholders exchanging €200bn of sovereign debt for mix of new bonds of lower value and cash
Greece has finally set a date for a €200bn (£166bn) debt swap for private bondholders, which is part of a second €130bn bailout for the country that is being presented for approval by eurozone finance ministers on Monday. Greece’s cabinet approved another set of austerity measures on Saturday, paving the way for the rescue package.
The swap involves private bondholders exchanging €200bn of Greek sovereign debt for a mixture of new bonds of a lower value and cash. The long-awaited debt restructuring will happen between 8 and 11 March, not long before Athens has to pay back a €14.5bn bond maturing on 20 March. The deal hammered out with private creditors will offer them new 30-year bonds with a coupon, or interest rate, of around 3.75%, which would rise if Greece achieved stronger-than-expected economic growth.
The European bailout fund, the European Financial Stability Facility (EFSF), is expected to make €30bn available as a cash sweetener for bondholders, which would translate into 10-15% of their holdings. Without that cash banks and hedge funds would probably walk away, as they will be made to suffer losses, or a “haircut” of up to 70% on their bond holdings. The size of the sweetener and the final interest rate are expected to be set by eurozone officials before the finance ministers’ meeting on Monday.
A voluntary agreement with bondholders is crucial to avoiding a disorderly debt default, which would send shockwaves through global financial markets.
The Greek parliament is expected to vote through legislation this week on so-called collective action clauses which would force some investors to take losses of 70% on their holdings.
The European Central Bank’s bonds will be exchanged for new ones but it is likely to be exempt from the restructuring and will be repaid in full. This has angered private investors. The ECB’s profits will be recycled back to eurozone governments, though.
Exempting the ECB could trigger debt insurance contracts, known as credit default swaps, some analysts say. This could weaken the euro.
“It may appear that the ECB is receiving preferential treatment, raising questions about whether the ECB is senior to private-sector bondholders,” said Chris Walker, a foreign exchange strategist at UBS. “If a coercive default does indeed eventually take place then a CDS event seems very likely with all the negative consequences for risk appetite that may bring.”