21 November 2011

FT: Deal over Greek bonds to set template

The debate about how big the losses that holders of Greek bonds should suffer is about to bubble up to the surface again. Banks and insurers are on the verge of forming a steering committee to represent creditors in talks with Greece.

The real importance of the so-called private sector involvement (PSI) talks is not about Greece but about establishing a template for restructurings in the eurozone. “It is not about Greece. It is not about the money. Most banks have written down their Greek bonds. It is about a precedent for the rest of Europe and how the rules will be set going ahead”, says one person involved in the talks.

Few details were agreed on how this was all to be achieved. This is where the latest talks come in. They will be crucial in establishing the size of losses that banks have to take. By tweaking things like the discount rate used for valuations and the coupon paid, banks are able to adjust their net present value losses enormously.

Negotiators say the talks between Greece and the steering committee set up by the Institute of International Finance (IIF), a grouping of the world’s largest financial institutions, will start soon and aim to produce an agreement very quickly. But they caution that the talks will be starting afresh so little should be read into previous proposals.

Two recent proposals that have circulated show how discussions might proceed. One, circulated earlier this month, came from the IIF itself, while another is what bondholders were presented by Greece. The IIF proposal tries to minimise losses to bondholders and ends up with an NPV loss of 51 or 52 per cent by boosting the coupons and discount rates used. In addition, it insists any new bonds that investors receive as part of the exchange be issued under UK law – a tactic designed to make any future Greek restructurings more difficult to do.

The Greek proposal would have led to far bigger NPV losses, say bondholders. One calculates them at 68-74 per cent. In an attempt to give incentives to investors with bonds soon to mature – who otherwise might be tempted to hold them to maturity and receive 100 per cent of face value – Greece would have offered them more cash and fewer bonds than other investors.

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