September 30, 2011

Greece May Swap Century Bonds for Short-Term Debt

Deferring debt for 100 years could help avoid default

Greece is considering the possibility of exchanging century bonds for outstanding short-term debt, with the idea that deferring payback for 100 years might be a popular option among investors and avoid Athens having to resort to default.

Reuters reported that the century bond idea was being considered, citing as its source a banker with one of the financial institutions providing Greece with advice on its debt dilemma. The idea was being discussed, he said, with the likelihood that the bonds would be modeled after Brady bonds, which were partly backed by U.S. Treasuries when used to rescue Latin American countries that had defaulted on commercial bank loans in the 1980s. Other banks involved in the current debt restructuring exercise with Greece would not confirm the report.

One reason Greece may be considering adding century bonds to its arsenal is that Mexico introduced a 100-year bond a few weeks ago to strong demand. Previously Athens had been advised to consider offering 30-year or 40-year bonds in exchange for short-term debt.

Tim Jagger, a Singapore-based RBS credit strategist, was quoted saying, "The financing costs of Greece are going to be horrible, but more importantly such a move avoids default. It's more about surviving rather than doing what is right from a long-term financing point of view."

The long duration of a century bond would provide a less volatile security to investors if interest rates increase; however, it would also mean that nominal face value would be subject to greater fluctuation for smaller yield changes, and that coud make such an investment attractive to hedge funds.

The likely high liquidity of a theoretical 100-year bond from Greece would also make it desirable.

Jagger also commented, "It could be a low coupon but massively sub-par bond so you get the par effect in yield terms. The CDS trades on an upfront basis and the massively inverted curve indicates distress in the near term and lower risk for longer-term credit."

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