March 7, 2012

Big Banks Join Greek Debt Swap

Société Générale, others agree to accept write-downs

The second largest bank in France joined Assicurazioni Generali, UniCredit and Greece’s six biggest banks in accepting the terms of the debt swap that is one condition of Greece’s second bailout.

Bloomberg reported Wednesday that Finance Minister Evangelos Venizelos said Greek pension funds would also join the deal. The Greek banks alone at the end of September held about 42 billion euros ($55 billion) in bonds eligible for the swap, and their participation was regarded as critical. The pension funds add another 17 billion euros in debt, but other pension funds with holdings of another 6 billion still have not decided whether to take part.

By Thursday Greece must win over the rest of the participants to exchange new bonds for old, or it will invoke collective action clauses to compel additional bondholders to participate. The target is to reduce the country’s privately held debt of 206 billion euros ($270 billion) by 53.5%.

Patrick Armstrong, managing partner at Armstrong Investment Managers in London, has already said he will not join the exchange, thanks to a “minuscule” possibility that his bond will be redeemed at par; it matures on March 20. If it is not, he was quoted saying, “I do fully expect to be part of the collective action clause.”

If the swap does not occur, the Greek finance ministry said in a statement that “the official sector will not finance Greece’s economic program and Greece will need to restructure its debt.” Greece plans to trigger CACs to force reluctant bondholders to participate; however, that could bring its own repercussions.

Marc Chandler, the head of global currency strategy at Brown Brothers Harriman in New York, said in a note that there “is likely be fallout in the peripheral countries, including Spain and Italy,” and possible negative effects on financial shares.

CACs are also likely to bring a triggering of credit default swaps.

Reuters reported that an Institute of International Finance document, marked "IIF Staff Note: Confidential," predicted dire consequences should the swap fail. In part, it said, "When combined with the strong likelihood that a disorderly Greek default would lead to the hurried exit of Greece from the euro area, this financial shock to the ECB could raise significant stability issues about the monetary union."

Gary Jenkins, analyst at Swordfish Research, was quoted saying, "Obviously the report is written on a worst-case basis to try and encourage participation in the exchange."

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