Greek Debt Swap Feared Short of Goal

No clear strategy in place if there’s a shortfall in participation

greek flagBanks and insurers, who were supposed to declare Friday whether they would join the bond exchange that was a condition of a second bailout for Greece, were slow to declare themselves, and a shortfall was feared at midday.

Reuters reported that the level of participation was expected to come in around 70%, considerably short of the 90% target. There was the potential for latecomers to declare just before the deadline, but officials were more focused on the lower number as the day progressed.

The bailout is already in danger thanks to Greece's failure to meet its economic targets, and Athens itself had threatened to cancel the agreement if the 90% participation level is not reached. However, the country has little choice but to proceed regardless. The 90% goal would provide for 135 billion euros ($189 billion) of Greek bonds maturing by 2020 either exchanged or rolled over in a global transaction.

Reluctance to participate could be chalked up to the current impasse between International Monetary Fund (IMF) and euro zone officials and the Greek government over missed fiscal goals; inspectors from the IMF have left the country and talks have ceased regarding the next tranche of loans. The interruption had not been planned.

Both Greek bank shares and the euro fell, and insuring Greek debt against default became exceedingly expensive, passing 3,000 basis points.

Worries over euro zone banks' solvency thanks to the levels of debt they hold was on her mind when IMF Managing Director Christine Lagarde urged countries to work more quickly to recapitalize their banks. European Union (EU) officials have downplayed her warning and challenged the IMF assessment of banks' need for capital.

However, Lagarde said in a speech prior to a G7 meeting of central bankers and finance ministers, "In view of the heightened risks and uncertainties—and the need to convince markets—somesome banks need additional capital. We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity."

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