ATHENS – A deal forcing investors to take huge losses on Greek bonds – including small bondholders who were supposed to be exempted – wrote down the country’s debt by $134 billion but also triggered payments of some $2.89 billion to those who bought protection against the restructuring, the Depository Trust & Clearing Corporation said. The payouts came as a result of former Finance Minister Evangelos Venizelos, now leader of the PASOK Socialist party and a candidate for Prime Minister in elections this spring, activating so-called Collective Action Clauses (CAC’s) in which Greece refused to pay investors the full value of their holdings because they wouldn’t voluntarily take losses of 74 percent over a 30-year repayment period.
The payouts will come as a result of a decision by the International Swaps and Derivatives Association IDSA’s subsidiary EMEA (Europe, Middle East, Africa) Determinations Committee earlier this month to declare that a so-called “credit event” had been caused by Greece’s unilateral action. While Greece got some immediate and temporary relief, some analysts said the country has effectively locked itself out of the private market for borrowing and will have to keep relying on bailouts from the Troika of the European Union-International Monetary Fund-European Central Bank (EU-IMF-ECB) unless the economy recovers enough to give investors confidence they won’t get burned again.
Greek and Troika officials said the write-down was necessary to help the country try to reduce its debt from 160 percent of Gross Domestic Product (GDP) now to 120 percent in eight years, although that figure has again been revised upward as austerity measures attached to two bailouts, the first for $152 billion and the second pending package for $172 billion, have created a deep recession of 21 percent unemployment and led to the closing of more than 111,000 businesses.
The payments to speculators will make up the difference between the recovery rate of 21.50 euro cents determined at an auction to set the value of new Greek bonds and the full face value of Greek debt. The ISDA said its decision was based on Greece’s use of CAC’s to amend the law governing terms of government-issued bonds “such that the right of all holders of the Affected Bonds to receive payments has been reduced.” CAC’s are rules governing bond agreements whereby a certain majority of bondholders can force a minority to accept terms of a restructuring or swap. The retroactive inclusion of CACs meant the losses were forced on all investors holding bonds governed by Greek law.
Greece’s finance ministry said creditors tendered 85.8 percent of the $235.4 billion in bonds regulated by Greek law. This would reach 95.7 percent of all privately-held Greek debt with the use of CACs to enforce the deal on creditors who refused to take part voluntarily. According to DTCC, since it began tracking credit default swaps in 2003, the only other sovereign credit event to trigger a payout was Ecuador in January 2009 with a net notional amount of $473 million.
(Sources: Reuters, Bloomberg)
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