Greece may cut national debt by €27bn in bond swap
Published 24/09/2011 | 05:00
GREECE could cut its national debt by €27bn if banks go ahead with a plan to swap old bonds for new debt, banking representatives said last night.
A deal on exchanging the bonds would ease fears of a disorderly default by Greece, at least in the short-term. Revived hope for the plan came at the same time as news that European governments are trying to speed up the establishment of a permanent European rescue fund.
The proposed bond swap is likely to be first on the agenda. It was one of the measures agreed for Greece by euro area heads of government at a meeting in July and could happen in weeks.
The swap was in doubt in recent weeks, but last night negotiators said there were encouraging signs that 90pc of bondholders would back the plan.
The Institute of International Finance (IIF), which represents the banking sector in talks with the Greek government, said the scheme could save the equivalent of 12pc of the size of the Greek economy.
Getting banks to accept losses on their Greek loans is crucial in ensuring that rich countries provide the bulk of the money for a new bailout.
The intervention by the IIF looks to have been timed to rein in speculation that a Greek default could already be almost at hand.
That rose to a crescendo after Klaas Knot, a member of the governing council of the European Central Bank Governing Council was quoted saying Greece could default.
ECB officials have previously held a firm line denying any chance of a Greek default.
Greek newspapers also reported that Evangelos Venizelos, the country's finance minister, had talked about banks suffering a 50pc loss under an "orderly" default scenario.
Those reports were quickly denied by the government but could help drive banks to take the current offer, which involves a loss of around 21pc.
Recent falls in the market price of Greek government debt may well have helped get the deal back on track. A deal to buy back bonds at a discount is easier to complete the cheaper bonds become, and Greece has a budget of around €20bn for its buyback.
Under the debt-swap proposal, bondholders who take the new 30-year bonds will be partially guaranteed against losses by the rest of the eurozone, while their current bonds are only guaranteed by Greece.
If the swap succeeds it will help ease fears that Greece is in risk of an imminent default.
The private-sector participation, as it's called, will also provide €300bn in cashflow savings for Greece between now and 2020, the IIF said.
In the more medium term, bringing forward the planned permanent rescue funds would add around €500bn to the war chest available to fight the debt crisis.
It also includes formal provisions for sharing costs with bondholders for countries with "unsustainable" debt.
Officials apparently now plan to examine the advantages of creating the fund, known as the European Financial Stability Mechanism, a year ahead of schedule. (Additional reporting, Bloomberg)