Banks blame officials for Greek crisis

The last-minute collapse of negotiations for the restructuring of Greece’s €206bn of bonds held by the private sector left those involved pointing fingers at each other on Friday afternoon. Talks between between Greece and the private sector steering committee broke up with the latter saying the proposal had “not produced a constructive consolidated response by all parties”.

It added that discussions “are paused for reflection on the benefits of a voluntary approach”.

There were different theories as to precisely what led the talks to break down, but bankers involved in the discussions insisted that prospects for a deal were being hampered by disagreements between official sector creditors.

“The public sector can’t seem to deliver,” said one banker, speaking before the talks were put on hold. “At the moment discussions are going on at a high political level and we are waiting to implement any agreement but there are not many days left to agree on the details.”

“The official sector needs to come together to agree the procedural issues. It has never been clear who has been driving the deal”

Indications are that the IMF has been lobbying for a deeper restructuring than the “voluntary” 50% cut to the bonds’ par value agreed at a eurozone leaders meeting in Brussels on October 26 and 27, in order to get the country’s fiscal reform programme back on track.

A second banker said: “The official sector needs to come together to agree the procedural issues. There has to be a clear path to conclude a deal among themselves. It has never been clear who has been driving the deal.”

A €14bn bond comes due for repayment on March 20, which Greece will be unable to honour without further international help. Therefore any debt exchange will have to be executed before then. This could take a month to effect, meaning the final terms must be signed off within weeks.

Stake building

Even before the talks broke down, the growing risk of an uncontrolled default prompted continuing efforts by smaller banks outside the negotiating committee, which is led by BNP Paribas and the Institute of International Finance, to try to sell positions.

Hedge funds remain prepared to buy some lines, particularly bonds maturing over the next year, believing there is still a good chance these securities could be repaid in full, if the “voluntary” exercise is progressed and they are not forced to accept it.

One head of rates trading at a major dealer noted several instances in the fourth quarter when second-tier European banks looked to sell portfolios of Greek government bonds in the €50m to €100m range, with one trade reportedly even exceeding this.

While playing down the likelihood of all of these trades closing, the rates trader noted leveraged accounts had succeeded in building up large holdings of Greek government bonds recently.

“We saw probably five big transactions in the fourth quarter, and some of them definitely closed because some hedge funds have been able to build reasonable positions [in GGBs] of a few hundred million. You cannot [build a decent position] by buying €1m pieces,” he said.

If one party managed to accumulate between a quarter and a third of a given series it might be able to block a debt exchange, making it likely that investors would focus on particular bond maturities. Foreign-denominated Greek debt that is subject to English law is also thought to be particularly targeted by vulture funds.

ECB uncertainty?

Further uncertainty has been added by what the European Central Bank, the third member of the Troika, plans to do with its estimated €40bn of Greek bonds picked up under the Securities and Markets Programme since June 2010.

This makes it the largest holder of Greek bonds. However, President Mario Draghi reiterated that it was not a party to the current negotiations between Greece and its private creditors.

If the take-up of the bond offer is unsuccessful and a deeper, more coercive restructuring is required, using retrospectively introduced collective action clauses, the ECB will face a dilemma.

If it continues to hold out, it will subordinate all other holders who will see their Greek holdings in effect wiped out. But this would have other consequences. Many are European banks that would have their capital compromised and so need to be supported by the ECB. It would also make the institution’s holdings in other sovereigns, namely Italy and Spain, senior too.

“If collective action clauses aren’t binding on the ECB it’s hard to see how they could be binding on others,” said the hedge fund manager. “If bonds bought by the ECB are de facto senior, it turns the SMP into a double-edged sword. For every Italian bond the ECB buys, that could be less Italian debt servicing power for everyone else.”