Bloomberg News

Greek Crisis Investor Burden May Be Rising Already, IIF Says

October 05, 2011

(Inserts Greek bond prices in eighth paragraph. See EXT4 <GO> for more on the European debt crisis.)

Oct. 5 (Bloomberg) -- Investors may be taking on a bigger share of Greece’s rescue costs as market conditions worsen even without changing the terms of the debt swap agreed to in July, the Institute of International Finance said.

“The implied subsidy granted by the private creditors is much larger today, given that market rates are much higher,” Charles Dallara, managing director of the Washington-based trade group, said in a telephone interview yesterday. IIF represents more than 450 banks and took part in the July 21 negotiations that led to a second rescue package for Greece.

When the bailout was announced, banks and other bondholders were expected to contribute about 50 billion euros ($66 billion) alongside 109 billion euros in public funds and a proposed 20 billion-euro debt buyback. German Finance Minister Wolfgang Schaeuble told reporters in Luxembourg yesterday that the deal may require “adjustments” depending on whether Greece has met its commitments and other developments.

Dallara said it would be “counterproductive” to reopen the Greek deal now that investors have signaled support and the euro area’s 17 parliaments are close to ratifying other elements of the July 21 agreements. The IIF hasn’t been formally consulted and isn’t clear on the nature of the “technical adjustments” suggested this week by Schaeuble and Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro area finance ministers.

Debt Burden

Over the next nine years, the swap is expected to reduce Greece’s debt burden by about 60 billion euros because of lower interest costs, Dallara said. He said Greece also would benefit from the long-term financing, which extends up to 30 years.

“We are on the verge of providing assured financing over this 9-year period of 130 billion euros,” Dallara said.

When the deal was first proposed, IIF said investors would absorb 21 percent losses in net present value terms. Dallara, without providing a new estimate, said changing market conditions mean bondholders would be foregoing even more.

Greek 10-year bonds trade for about 39 cents on the euro and two-year notes for about 43 cents, according to data compiled by Bloomberg.

Creditors “expect Europe to follow through” on the July 21 agreement, Dallara said. “This deal was done at the head of state level. We remain committed to the deal.”

Greek authorities are ready to move forward with the debt swap as soon as euro-area parliaments finish ratification.

“They are prepared,” Dallara said. “I would not think it would take a great deal of time at all.”

When the debt swap takes place, Greece is expected to enter a temporary period of default, now widely anticipated by European authorities and market participants. The proposed buyback is intended to take place at the same time, the IIF said, to minimize the amount of time Greece spends in this selective default state.

--Editors: Craig Stirling, Patrick Henry

To contact the reporter on this story: Rebecca Christie in Brussels at

To contact the editor responsible for this story: James Hertling at

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