Greece pushes ahead as time runs out

Greece is still expected to press ahead in the coming weeks with its long-awaited plan to persuade private sector bondholders to voluntarily swap their holdings for new instruments at a lower overall value, even though many elements of its second €130bn bailout remain unclear.

Last week, a meeting of eurozone finance ministers called to approve the deal was cancelled. Some countries with Triple A ratings, principally Germany and Finland, wanted more commitments from Greek politicians to implement austerity measures after this April’s planned election.

In addition, these reluctant countries also indicated that they would need parliamentary approval to release the required money, which is earmarked to come from the European Financial Stability Facility. Germany is not scheduled to conclude such a debate until February 27.

“I think the last absolute day to launch an offer is the end of February. That gives you three weeks but it is cutting it extraordinarily fine”

“No major financial commitment in the eurozone can be made without Bundestag support,” said one person involved in the negotiations.

That is just three weeks before a €14.4bn Greek bond comes due on March 20. Greece has seven days’ grace to redeem the bond and carrying out an exchange offer in this period will be tight, but not impossible.

“I think the last absolute day to launch an offer is the end of February,” said a legal source close to the discussions. “That gives you three weeks but it is cutting it extraordinarily fine.”

Two separate documents from Greece’s advisers, Lazard and Cleary Gottlieb, seen by the Financial Times, said a deal could go ahead without the bailout money being formally signed off but recommended against such a move being taken.

In order to persuade bondholders, that between them hold bonds with a face value of about €200bn, those accepting the deal are to be offered 15% in cash or collateral, namely long-term paper issued by the EFSF, as well as 35% in new long Greek bonds with a coupon of about 3.6%.

That, however, means €30bn is required for Greece to buy EFSF bonds to pass on to these accepting bondholders. In addition, about €25bn will be needed by Greece to recapitalise its banks, which are the largest holders of Greek bonds, as well as €35bn for a temporary liquidity facility.

No commitment

Northern eurozone countries and the IMF have balked at giving Greece so much money from the bailout fund upfront when so many reforms have yet to be implemented and some parties have not committed to carrying them out should they form the next government in April.

However, rather than put the deal off until after the election, by providing a bridge loan so that Greece could meet the €14.4bn March redemption, moves are now afoot to boost the take-up of the voluntary private sector offer.

The European Central Bank has agreed to swap its €55bn of bonds acquired in the secondary market for securities with new ISIN codes that will not be included in any wider debt exchange. Indeed, this may already have taken place last Friday.

There had been concerns that the ECB would not vote for any collective action clauses to be inserted into bonds it held. This would have made it hard to use this as a tactic to persuade acceptance of the offer. Now with these bonds, accounting for a quarter of the total, retired, inserting CACs is easier.

“There are many, many steps required. This is a mosaic that is coming together and we still have a way to go”

Carrying out such an exercise for Greek law bonds, which account for at least 90% of the total, is relatively easy as no meetings would be necessary, but formal meetings would have to approve changes to bonds written under foreign law, which would delay the process.

“There are many, many steps required,” said the person involved in the negotiations. “This is a mosaic that is coming together and we still have a way to go.”