14 February 2012

FT: EU moves on Greek debt swap

Eurozone finance ministry officials were moving to begin a €200 billion Greek debt restructuring without approving a new bailout for Athens and in the face of legal warnings – a sign that the EU will ask for more proof that Greece is living up to austerity commitments before handing over aid.

The debt restructuring could begin as early as Friday and be completed by the end of the month. But a decision on the second bailout of Greece would be delayed until a European summit on March 2, and be approved only if leaders believed the Greek government had lived up to the “prior actions”, which include deep wage cuts and mass sackings, demanded by eurozone lenders last month.

The move, which is still being debated, would set up weeks of renewed uncertainty over whether Athens would default on a €14.5 billion bond due on March 20. Although the debt restructuring would cut that amount in half, Greece would still default on the remaining redemption if it did not get a new bailout beforehand. Further complicating measures, eurozone officials were contemplating beginning the debt restructuring – a swap where private bondholders trade their €200 billion in current holdings for new bonds with half the face value – without the money needed for the deal in place.

According to an “issues note” distributed to the euro working group last week, eurozone countries must raise €93.5 billion to complete the debt swap. Of that amount, €30 billion would go directly to private bondholders as “sweeteners” to participate in the deal. Another €23 billion was needed to recapitalise Greek banks, which would be wiped out when their huge Greek bondholdings were slashed in value.

But the documents show national parliaments are not expected to approve the €93.5 billion until after the debt swap is launched. Eurozone officials are moving in this direction despite receiving advice from outside legal and financial advisers that the swap could fail without the money in place.

Full article (FT subscription required)

© Financial Times