Private-sector involvement in Greek rescue

[vitorrslopes]

Fund threatens to sue over Greek bond losses

One of the most prominent hedge funds holding Greek bonds has threatened legal action against officials negotiating the country's debt restructuring if losses are too deep, raising a hurdle to eurozone leaders' hopes of quickly reducing the country's debt levels.

Madrid-based Vega Asset Management, an original member of a steering committee for bondholder negotiators, wrote to fellow investors this month to say that it would consider suing if Greece insisted on writedowns of more than half the net present value of the debt.

"Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome," Jesús Sáa Requejo, a senior Vega executive, wrote in the letter on December 7. "Vega needs to start considering all available legal options to refuse and challenge any exchange that implies a NPV loss of more than 50 per cent."
Vega, which has resigned from the steering committee, declined to comment.
The Greek bond deal is the centrepiece of a €130bn second Greek bail-out negotiated at an October summit in Brussels. Bondholders agreed to take a 50 per cent "haircut" on the face value of their bonds, which officials estimated would knock about €100bn off Greece's €350bn debt pile.
European leaders had hoped to complete the deal by the year's end through a bond swap, where debt holders exchange their holdings for new bonds worth less. Greece is facing a bond repayment of €14.4bn on March 20 and officials are pushing to get a deal done well in advance so that Athens did not have to pay the full amount.
But the deal's details were left open and bondholder representatives said the two sides remained far apart on financial specifics. Despite the agreed 50 per cent nominal haircut, the long-term value of the new bonds can change significantly by adjusting their interest rates.
Evangelos Venizelos, Greek finance minister, said this week that a deal was close, and two top Greek bankers briefed on the talks said Athens had agreed to allow the new bonds be issued under British law – a key bondholder demand, making it more difficult for Greece to force more losses on investors.
In addition, bondholders won concessions that the new bonds would be on an equal footing with new European Union bail-out loans, meaning any future default would hit eurozone governments just as hard as private investors.
But people close to private bondholders said the two sides were still far apart on the interest rate – known as a coupon – on the new 30-year bonds.
Vega is thought to have been upset by the negotiating approach of Greece and international lenders, including the EU and International Monetary Fund. According to one participant, at meetings Vega complained about the refusal of the European Central Bank to take any losses on its holdings or for Greek banks – in effect wards of the state – to accept write downs.
The debt swap is expected to offer private bondholders a cash payment equal to 15 per cent of current holdings, plus new 30-year bonds worth 35 per cent of the current bonds' face value. The coupon is expected to end up between 4.5-5.5 per cent, one banker said, higher than the 4 per cent projected by the IMF.
The IMF has warned that without "near-universal" participation by private bondholders, getting Greek debt down to sustainable levels might be impossible, making Vega's stance particularly problematic.
To deal with holdouts, Greece is weighing introducing collective action clauses into domestic bond laws, which would allow Athens to unilaterally impose haircuts on holdouts if a certain percentage of investors – perhaps 70-75 per cent – agreed to them.

[vitorrslopes]

http://www.reuters.com/article/2012/01/19/greece-idUSL6E8CJ4EE20120119


Jan 20 (Reuters) - Greece and its private bondholders resume debt swap talks on Friday amid signs they are inching closer to a long-awaited deal needed to prevent a chaotic default by Athens.

Cash-strapped Greece is fast running out of time as it pushes to wrap up an agreement by Monday paving the way for a fresh injection of aid before 14.5 billion euros ($18.5 billion) of bond redemptions fall due in March.

After a breakdown in talks last week over the coupon, or interest payment, that Greece must offer on its new bonds raised fears of a disastrous bankruptcy, the two sides appeared to be moving to overcome their differences.

"The atmosphere was good, progress was made and we will continue tomorrow afternoon," Finance Minister Evangelos Venizelos said after Thursday's round of talks in Athens with Charles Dallara, head of the Institute of International Finance representing bondholders.

The IIF issued a statement echoing the minister, and called the discussions "productive".

Bankers and sources close to the talks say an agreement could be sealed in the next few days, though previous predictions of a quick resolution have proven premature.

The stakes could not be higher as the two sides head back to the negotiating table on Friday.

Greece needs to have a deal in the bag before funds are doled out from a 130 billion euro rescue plan that the country's official lenders, the European Union and the International Monetary Fund, drew up in October.

The paperwork involved alone is expected to take weeks, meaning failure to secure a deal soon could put Athens at risk of a chaotic default in March, which in turn could jolt the financial system and tip the global economy into recession.

A large chunk of the bond swap must be agreed by noon on Friday and formalised before Monday's meeting of euro zone finance ministers, Venizelos has said.

Adding to the pressure, officials from the "troika" of foreign lenders are due to begin meetings with the Greek government on Friday to discuss reforms and plans to finalise that bailout package.

"Now is the crucial moment in the final battle for the debt swap and the crucial moment in the final and definitive battle for the new bailout," Venizelos told parliament. "Now, now! Now is the time to negotiate for the sake of the country."

VARIABLE COUPON

Progress has been hard to come by in the latest round of negotiations, with bankers worried about suffering losses far higher than the 50 percent writedown they were expected to take on the nominal value of their bonds.

Actual losses for investors are expected to be much higher depending on the terms, such as the coupon, being negotiated.

A source close to the talks earlier said Athens and its foreign lenders had initially offered a coupon of just over 3.5 percent, but bondholders rejected that as too low. They were seeking a coupon of at least 4 percent, the source said.

One of the options being considered is a coupon that rises after staying stable for the first 10 years, another source close to the talks has said.

Investors have also bridled at Greece's threat to enforce losses if not enough bondholders sign up to the deal.

The swap is aimed at cutting 100 billion euros off Greece's over 350 billion euro debt load.

Greece is stumbling through its worst economic crisis since World War Two, with unemployment at record highs and near-daily protests and strikes against austerity measures that have deepened an already brutal recession.

Nearly one out of two youths is unemployed and anger against waves of tax hikes and pay cuts is running high.

Its latest bailout - drawn up on condition Greece pushes through painful cuts and structural reforms - is expected to reduce Greece's debt to a more manageable 120 percent of gross domestic product in 2020 from about 160 percent now.