Greece Update: Where Things Stand on Debt Exchange Deal

With Tuesday’s 200-point decline in the stock market having been blamed on concerns about the Greek debt swap getting done and the deadline for the debt exchange looming, we thought it would be worthwhile to update everyone on where things stand on Greece’s debt swap this morning.

For starters, the offer from the Greek government to exchange existing bonds ends at 20:00 GMT today, which is 4:00 pm eastern time. Reports indicate that the government will announce the results on Friday at 06:00 GMT (or 2:00 am Friday morning est).

StreetAccount notes that there have been relatively few new developments overnight, though Reuters did highlight comments from a Greek official who said that the debt swap offer is "going well" and that Greece is "optimistic" about getting the deal done.

A Greek official added, "The pace of responses to the bond offer is good, the percentage of bondholders tendering voluntarily is very high". We note that that Reuters reported yesterday that a senior Greek finance ministry official said that the government was optimistic that well over 75% of eligible bonds would be submitted, easily clearing the 66% threshold for Greece to activate CAC’s (collective action clauses) and enforce losses on any holdouts.

In addition, the FT is reporting that people close to the deal indicate that the expected activation of CACs on the €177B of bonds governed by Greek law would produce a total participation rate of at least 86%. The FT added that when combined with the tender of even just a small portion of the remaining 14% of bonds governed by foreign laws, Greece would be able to hit its 90% success rate. However, a separate FT article noted that it is unlikely that enough debt will be tendered to reach the 95% the IMF has said is necessary to get Greece's debt down to 120% of GDP by 2020.

Speaking of private sector holdouts, there continues to be a great deal of focus on the potential for some private sector investors (primarily hedge funds) to forgo the debt swap deal in the hopes for a legal settlement. Much of the discussion on this topic has revolved around the ~14% of the €206 billion eligible for restructuring that is governed by foreign laws. The FT reported Wednesday that Greece can only force holders of foreign-law bonds to participate in the debt swap by the use of CAC’s on an issue-by-issue basis, making it much easier for hedge funds to attempt to block the debt swap.

However, Greek officials said earlier this week that it does not expect to have any funds available to pay private sector holdouts. The FT said that some hedge fund managers believe it might cost the Greek government relatively little to pay them off in full compared with other bond issues. The article noted that the bonds in question has traded at more than 70 cents on the euro in recent weeks, which is significantly higher than Greek-law bonds which have been trading in the low-to-mid 20’s.

One of the big issues not being discussed much in the press is the question of whether or not the Greek debt exchange will trigger a “credit event” which, in turn, would cause Credit Default Swaps to pay out. Recall that the ISDA (the agency charged with determining if a “credit event” has occurred, which would trigger CDS payouts) said in January that Greek CDS payouts would likely be warranted if the government implemented the CAC’s.

At issue is the fact that Greece is widely expected to activate CAC’s on the €177 billion of bonds that were written in Greek law. Greece will need to enforce the CAC’s in order to get participation levels in the swap up to needed levels. In turn, the activation of the CAC’s is expected to lead to another request for the ISDA to declare a credit event.

Analysts estimate that a Greek credit event would trigger approximately $3.2 billion in CDS payments between buyers and sellers of default protection. Dow Jones reported recently that the ISDA would likely decide to hold an auction to determine the value of Greece's debt and therefore, how much would be paid out in CDS. The article cited comments from an ISDA spokeswoman who said that other credit events "have been handled smoothly" and the association "expects the same if and when a credit event occurs with regard to Greek sovereign CDS."

 

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