Bloomberg News

Vienna Plan Redux Requires Investor Acquiescence: Euro Credit

June 03, 2011

June 3 (Bloomberg) -- Greek bondholders may be about to receive an offer they can’t refuse.

The European Central Bank was said to back a plan this week to persuade investors to replace maturing Greek bonds with new, longer-dated securities. The idea is modeled on the Vienna Initiative for eastern Europe in 2009. Greece, which faces a 30 billion-euro ($43 billion) funding gap next year, is locked out of markets. Its 10-year bonds yield more than 16 percent.

“I don’t know to what extent the exchange would actually be voluntary,” said Axel Botte, who helps manage about $770 billion as a strategist at Natixis Asset Management in Paris and holds short-dated Greek bonds. “I don’t know what kind of exchange would be both in the interests of the banks and would be material enough to change the debt sustainability.”

Greece was supposed to be able to fund itself on markets under the 110 billion-euro European Union and International Monetary Fund rescue last year. Moody’s Investors Service this week said Greece has a 50 percent risk of default.

The ECB holds about 50 billion euros of Greek securities, according to Andrew Sheets at Morgan Stanley in London. About 60 billion euros of Greece’s 287 billion euros of bonds mature through the end of 2012, Bloomberg data show, and are due to be paid off at par using public money.

Maturing Debt

Greek bonds maturing in December trade at about 89 cents on the euro, Bloomberg Bond Trader prices show. Those due less than two years later are quoted at 67 cents, suggesting investors aren’t expecting to be paid in full.

European authorities would have to persuade 90 percent of investors to reinvest maturing principal into fresh debt for the plan to work, said Hans Humes, president of New York-based Greylock Capital Management and former co-chairman of the Global Committee of Argentina Bondholders, which represents investors who suffered losses when the South American nation defaulted a decade ago.

“You’d need to be assured that it’s a solution and not a stop-gap,” Humes said. “There’s going to be a lot of political pressure to accept it.”

The EU wants holders to roll over notes as they mature, pushing out maturities without triggering a default, people with knowledge of the situation said this week. Such a plan would ease strains on Greece without forcing other nations in the EU to recapitalize banks that would suffer losses from marking down defaulted Greek debt. Incentives for bondholders may include making the new bonds senior to existing debt, increasing coupon payments or securing the notes, they said.

Standard & Poor’s said it may consider a voluntary exchange to be a restructuring if investors were pressured into accepting the swap, without specifying how it would view an agreement to replace bonds with new ones as the debt matures.

Eastern Europe Model

“Given that the rollover idea is coming from the ECB, it means there is at least a chance it could postpone some of the issues that Greece faces without triggering a default,” said Johannes Jooste, a London-based strategist at Merrill Lynch Global Wealth Management, which oversees more than $1.5 trillion.

The Vienna initiative was introduced after Lehman Brothers Holdings Inc. collapsed. Banks including UniCredit SpA, Raiffeisen International AG and Societe Generale SA pledged to keep eastern European units afloat by rolling over funding and providing fresh capital.

Societe Generale SA Chief Executive Frederic Oudea told the Wall Street Journal his bank would hold Greek debt to maturity and participate in whatever happens. The Paris-based lender, France’s second-largest, has 2.4 billion euros of Greek debt, the WSJ said.

Too Many Actors

“If the terms are attractive enough, you could probably roll over the bonds,” said Joost Van Leenders, who helps run $787 billion as a strategist at BNP Paribas Investment Partners in Amsterdam. “It would be very attractive just to get out at par. You’d be bailed out by the EU and the IMF.”

A deal may not be possible because of the number of participants involved, according to Nicola Marinelli, a fund manager at Glendevon King Asset Management in London, which oversees $153 million. He doesn’t own Greek bonds.

“I don’t think a Vienna-style initiative will work,” he said. “Eastern Europe was more of a niche. A few banks had 70 percent of the total exposure. There are many different groups, asset managers, banks and insurers involved in Greece. You are just postponing the problem. A haircut is the end-game.”

Andrea Beltratti, chairman of Intesa Sanpaolo SpA, said this week that asking bondholders to reinvest is “not the best solution.” Italy’s second-biggest bank owned about 900 million euros of Greek debt at the end of April, according to a May 13 presentation.

‘Concentrated Holdings’

Laurent Fransolet, a strategist at Barclays Capital in London, reckons the top 30 creditors account for about two- thirds of Greek debt. Greek residents have about 32 percent of the total, while euro-region investors hold another 58 percent, including the ECB’s 14 percent, according to a May 11 report.

“Concentrated holdings mean you could probably get a voluntary agreement that would have a meaningful impact,” he said. “It would buy time. You wouldn’t be solving the situation, and it wouldn’t be the last intervention.”

The key issue is to avoid default because of the potential turmoil it would cause in other markets, Merrill’s Jooste said. The ECB has ruled out a restructuring before 2013.

Recommending a Vienna-style agreement to clients depends “on the fine print and whether the deal could work on a non- default basis,” he said. “We are way more worried about what to do about other bond and equity markets. If it can be done without triggering a default, the reaction would be relatively benign. If it triggered a default, all bets are off.”

--Editors: Keith Campbell, Mark Gilbert

To contact the reporters on this story: John Glover in London at; Emma Charlton in London at

To contact the editor responsible for this story: Mark Gilbert at

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