Bloomberg News

Greek Investors May Shun Bailout as Losses Top 21%: Euro Credit

July 29, 2011

(See EXT4 <GO> for more on Europe’s debt crisis.)

July 29 (Bloomberg) -- Greek bondholders may resist pressure to reinvest in the nation’s securities as part of a bailout agreement as potential losses exceed the 21 percent estimated by the Institute of International Finance.

JPMorgan Chase & Co. calculates the bonds may lose as much as 34 percent of their value, while Rabobank International anticipates losses of as much as 50 percent. That may be high enough to deter money managers from aiding the rescue, leaving European leaders to either foot a bigger share of the bill or compel private investors to chip in to meet a 90 percent participation goal.

“Our view is that IIF yield assumption in calculating this is too low,” said Pavan Wadhwa, JPMorgan’s global head of interest-rate strategy in London. “As the market stands right now, the haircut banks will take if they sign up to the IIF proposal would be much higher than 21 percent. The plan might fail as it’s going to be difficult to achieve the required 90 percent rollover rate that the IIF is hoping for.”

Greece is set for a second bailout in less than two years after the previous package worth 110 billion euros ($157 billion) failed to solve the euro area’s debt crisis. The new financing plan includes 109 billion euros from the euro region and the International Monetary Fund, with investors contributing 54 billion euros from mid-2011 to mid-2014, building to a total of 135 billion euros through 2020, according to the IIF.

Discounting Losses

JPMorgan said a discount rate of 12 percent, based on current weighted average of Greek yields, is a fairer way to calculate the losses than the 9 percent rate assumed by the IIF. The discount rate is the assumed reduction in the value of payments from the bond over time. The JPMorgan analysis also takes into account the value of underlying collaterals.

Greek debt is worth less than the 79 percent of face value suggested by the IIF calculation. Two-year notes yield about 30.95 percent, up from 27.63 percent on July 22, as the price of the securities slid to 67.24, or 32.76 below their face value. Five-year notes yield 16.94 percent at a price of 57.5 and 10- year bonds trade at 59.1 to yield about 14.81 percent.

The IIF, which lobbies on behalf of banks, said its members are prepared to participate in a voluntary debt exchange, with four options for Greek bondholders available under the program. Three of those would be backed by AAA rated zero-coupon securities and have a 30-year maturity, while the fourth would last for 15 years and be partially collateralized.

Maximum Benefit

“All instruments will be priced to produce a 21 percent net present value loss based on an assumed discount rate of 9 percent,” the IIF said on its website. “The interest rates are structured to maximize the benefits to Greece in the early years of the program as Greece regains access to global capital markets.”

The IIF said it assumed that an equal portion of investors will participate in each option. Greece hired BNP Paribas SA, Deutsche Bank AG and HSBC Holdings Plc this week to manage the voluntary bond exchange and debt buyback plan.

“More details about this program are likely to emerge in coming days and weeks, but at first glance the discount rate and assumed losses do look unrealistic,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London. “Perhaps they are figures that everyone is comfortable with. In any case, we think an actual overall haircut should be in the region of 40-50 percent.”

Erste, Emporiki Participation

Erste Group Bank AG, Austria’s biggest lender, said it will wait for “clarity” before deciding whether to sign up.

“We will make a decision once we feel really confident that whatever is presented is going to be the final package,” Andreas Treichl, the bank’s chief executive officer, told analysts in a telephone conference today. “The numbers are changing. We just want to have clarity.”

Credit Agricole SA, France’s second-largest bank by assets, said the participation of its Emporiki Bank of Greece SA unit in the program will result in an estimated 71-million-euro impairment to the Greek lender’s bondholdings.

Standard & Poor’s cut Greece’s credit rating to CC, two steps above default, from CCC on July 27. It said the proposed restructuring would amount to a “selective default” because the debt exchange would result in losses for creditors and was required to reduce the risk of a near-term default. Even after that, it said “the likelihood of a future default on the new securities is likely to remain high.”

‘Punitive’ Threat

Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, estimates that the losses may instead be less than 21 percent, based on applying the assumed discount rate to existing securities as well as the new bonds. That produces a deterioration of about 10 percent, he said.

“If the proposal fails due to lack of investor participation, the chances of a more punitive debt default/restructuring increase significantly,” Barclays economists including Garcia Pascual wrote in an investor report on July 26. “However, it may be wrong to consider this as a pure voluntary exchange. The offer is likely to be subject to a minimum participation rate, probably 90 percent, with a credible threat for those not participating of a more punitive restructuring.”

While the additional yield investors demand to hold 10-year Greek bonds instead of benchmark German bunds has narrowed to 1,220 basis points from a peak of 1,564 basis points on July 19, the spread is still up from 951 basis points on Dec. 31 and 745 basis points a year ago.

“I’m not quite sure where these numbers come from but the IIF has to do something to get private bondholders to sign on to the program on a voluntary basis,” said David Owen, chief European economist at Jefferies International Ltd. in London. “In my mind, it’s almost as if it was rushed out in a hurry. The bottom line is the private sector participation is not going be big enough to resolve Greece’s debt problem.”

--With assistance from Boris Groendahl in Vienna. Editors: Mark Gilbert, Keith Campbell

To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

To contact the editor responsible for this story: Mark Gilbert at magilbert@bloomberg.net


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