Bloomberg News

Greece Invites Investors to Debt Swap, Biggest Restructuring

February 24, 2012

Riot policemen in front of the Greek parliament during a protest in Athens on Feb. 22, 2012. Photographer: Petros Giannakouris/AP

Riot policemen in front of the Greek parliament during a protest in Athens on Feb. 22, 2012. Photographer: Petros Giannakouris/AP

Greece’s government formally asked investors to exchange their holdings of government debt for new securities in the biggest sovereign restructuring in history.

“The Ministerial Council of the Hellenic Republic today approved the terms of invitations to be made to private sector holders,” the Ministry of Finance said in a statement on a website set up for the exchange. The bonds subject to the invitation had a total face value of about 206 billion euros.

The government seeks a 90 percent participation rate and set a 75 percent rate as a threshold for proceeding with the transaction, according to the statement.

Parliament approved laws yesterday to permit the exchange and cut 106 billion euros ($143 billion) of the country’s debt. Private creditors gave their backing earlier this week as euro area finance ministers weighed a 130 billion-euro package for the nation, its second rescue.

Charles Dallara, who represented private bondholders in debt-writedown talks with the government, said he expects a majority of investors will agree to a voluntary bond swap.

“I’m quite optimistic,” Dallara, the managing director of the Institute of International Finance, told reporters in Mexico City today ahead of a meeting tomorrow of finance officials from the Group of 20 nations. He said that he expects “a high take- up” among bondholders.

Averting a Collapse

The swap is required to secure the European bailout and is geared toward averting the collapse of the Greek economy and default by a member of the euro. The exchange must be completed before March 20, when the country has to redeem 14.5 billion euros of bonds. In return, Greece has promised 3.2 billion euros of public-spending cuts. Interest payments on the new securities are set to start March 12.

“The dilemma we are faced with is cuts so that we can stand on our own two feet, to save the country’s pension system and pensions, or economic collapse,” Finance Minister Evangelos Venizelos told opposition party lawmakers in Parliament today. Without the debt swap, the country’s pension funds would be wiped out, he said.

The nation’s debt was forecast to balloon to almost double the size of its shrinking economy this year without the write- off, the European Commission said in November.

‘Titanic’ Effort

There’s a “titanic” effort under way to push through plans to reduce wages for civil servants and cut spending on defense, education and health care, Prime Minister Lucas Papademos said today at a Cabinet meeting in Athens.

Investors will forgive 53.5 percent of their principal and exchange the remaining holdings for Greek government bonds and notes from the European Financial Stability Facility. The coupon on the new bonds was set at 2 percent until February 2015, 3 percent for the following five years, 3.65 percent for 2021 and 4.3 percent until 2042.

Bondholders will exchange 31.5 percent of their principal into 20 new Greek government bonds with maturities of 11 to 30 years and the remaining 15 percent into short-dated securities issued by the EFSF. The new securities will be governed by English law.

Deutsche Bank AG (DBK) and HSBC Holdings Plc were appointed as closing agents for the exchange outside the U.S., according to the document. U.S. bondholders would receive cash instead of EFSF notes.

Fitch Ratings on Feb. 22 cut Greece’s credit grade two levels after the country got approval to proceed with the exchange, reducing the long-term foreign and local currency issuer default ratings to C from CCC.

‘Distressed Debt Exchange’

“The proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default,” Fitch said in a statement. “The exchange, if completed, would constitute a distressed debt exchange.”

Fitch said the country will get a “restricted default” rating after the swap starts, one level above “default.” Once the transaction is completed, it will be moved out of that category and “re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile,” Fitch said.

The country’s central government debt, which doesn’t include debt from local government organizations, state-run companies or pension funds, was 368 billion euros at the end of 2011, the ministry said today, amounting to 171 percent of the economy, according to Bloomberg calculations. The swap is meant to help reduce the debt to 120.5 percent of gross domestic product by 2020.

To contact the reporter on this story: Maria Petrakis at Natalie Weeks in Athens at

To contact the editor responsible for this story: Stephen Foxwell at

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