17 October 2011

FT: Bondholders warn on Greek deal

The potential losses for holders of Greek bonds has become one of the most controversial issues to be discussed by European Union leaders at a summit this weekend. Officials close to the negotiations said there was an attempt to find the sweet spot for losses that would ensure a large number of bondholders take part. “What is being looked at it is the trade-off between participation and haircuts”, one adviser said. He added that the ways in which losses might be imposed on investors remained uncertain, with tweaks to the original deal, a debt buy-back or a voluntary haircut still possible.

The deal structure is very complicated and means that, while investors will suffer losses of about 21 per cent, Greece will see its debt burden cut by a smaller amount. A haircut of 21 per cent would see Greece’s debt stock reduced by that amount as well. But officials familiar with the thinking of bondholders in the “private sector involvement” (PSI) deal warned governments against tinkering too much.

Policymakers remain keen on avoiding a credit event that would trigger payments on credit default swaps. To do this, they need to make the PSI deal voluntary for investors. If the losses were close to where the bonds were currently trading – two-year, five-year and 10-year Greek bonds all have prices of about 40 cents in the euro – then investors might decide not to tender in the voluntary offer and hold the bonds to maturity, at which point they would receive face value.

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