Bloomberg News

Momentum Is Building on Greek Debt Swap, IIF’s Dallara Says

March 02, 2012

Momentum is building toward the Greek debt swap after initial investor feedback and European policy-maker actions, said Charles Dallara, managing director of the Institute of International Finance.

“We’re quite encouraged by reactions we’ve heard and certainly expect this to be a very successful deal,” Dallara said in an interview on Bloomberg Television today. “The reactions that I’ve heard from key investors have been quite positive. We are sensing momentum building.”

Private creditors, represented by Dallara and the IIF, reached an agreement with Greek and European officials last week on the biggest sovereign restructuring in history. The plan seeks to reduce Greece’s borrowings by about 106 billion euros ($140 billion) and lower debt to 120.5 percent of gross domestic product by 2020.

Under the deal, investors will forgive 53.5 percent of their principal and exchange their remaining holdings for new Greek government bonds and notes from the European Financial Stability Facility. Euro-area finance ministers yesterday authorized the EFSF to issue bonds for the swap. The success of the deal depends on how many investors participate in the transaction.

Private debt holders must indicate by March 8 whether they will take part. The Greek government is seeking a participation rate of more than 90 percent and set a 75 percent rate as a threshold for proceeding with the transaction.

Triggering CDS

Europe’s largest lenders and insurers are likely to accede to the Greek debt swap because they’ve already written down their sovereign holdings and want to avert the risk of a default, analysts have said. Hedge funds holding Greek bonds may still resist the deal and seek to get paid in full, either by the Greek government or by triggering payouts from insurance contracts known as credit-default swaps.

The International Swaps & Derivatives Association said yesterday the bond swap didn’t constitute a credit event and wouldn’t trigger payouts on default insurance. The group will probably be asked to review the matter again if collective action clauses are used by Greece to compel investors to participate.

ISDA “may well decide at some point to review the matter again,” Dallara said. “For the time being I think things are on course, and this decision yesterday was not a surprise.”

Dallara said private creditors want to keep the agreement voluntary. When asked whether a triggering of CDSs would destabilize the financial system, he said, “I think there has been an exaggerated degree of concern about this.”

Not a Blueprint

The Greek debt restructuring is not a “blueprint” for other European economies because the country’s situation was “uniquely dysfunctional,” he said when asked about market concerns related to Portugal. He praised economic reforms by the Portuguese government, saying he’s confident the market will recognize the efforts over time.

“It’s been too painful, too difficult for Greece and I think if you look at the experience that Greece has gone through, no other country would want to be there and certainly the investors have no interest in being there,” Dallara said.

The European Central Bank offered a second round of three- year loans to the region’s banks this week to avert a credit crunch. The actions have eased concern that Europe’s banks would run out of cash or curb lending as the region’s sovereign-debt crisis drove up borrowing costs.

‘No Complacency’

The Frankfurt-based ECB doled out 529.5 billion euros to some 800 banks, surpassing economists’ median estimate of 470 billion euros in a Bloomberg News survey. European banking shares were upgraded by Goldman Sachs Group Inc. analysts, who said they anticipate a boost in liquidity and profit from the ECB cash.

While the ECB loans have provided “breathing space” to European banks and countries trying to tackle high debt and slow economic growth, Dallara dismissed concern they would lead to complacency on economic reforms.

“I do not sense any degree of complacency” among European leaders, he said. “They realize that liquidity is a very different concept than a fundamental improvement in their underlying creditworthiness. That’s what their programs are about and that’s where they need to remained focused. And I think they do remain focused.”

The IIF represents more than 450 financial firms. The Washington-based group’s steering committee that negotiated the swap included representatives from banks and insurers with the largest holdings of Greek government bonds, including National Bank of Greece SA, BNP Paribas (BNP) SA, Commerzbank AG (CBK), Deutsche Bank AG (DBK), Intesa Sanpaolo SpA, ING Groep NV (INGA), Allianz SE (ALV) and Axa SA. (CS)

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; David Tweed in Brussels at dtweed@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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