Bloomberg News

Greece Weighs Default or Yield Choice

May 15, 2012

Alexis Tsipras, leader of the Syriza, favors defaulting and an end to economic austerity.  Photographer: Simon Dawson/Bloomberg

Alexis Tsipras, leader of the Syriza, favors defaulting and an end to economic austerity. Photographer: Simon Dawson/Bloomberg

Greece, which hasn’t had a government for more than a week and whose 10-year debt yields more than 27 percent, decides today whether to pay 436 million euros ($562 million) to bondholders who shunned last month’s debt swap.

A floating-rate note sold a decade ago by Europe’s most- indebted nation matures today. Repaying the security would disadvantage investors who took losses in the bond exchange and voters facing spending cuts. Reneging on the obligation also would constitute a default, triggering derivatives contracts and clauses requiring the settlement of other unswapped bonds. Meantime, the country has no government to make the choice.

“The political vacuum means it’s very difficult for the interim government to take what are essentially political decisions about burden-sharing,” said Myles Bradshaw at Pacific Investment Management Co. in London, manager of the world’s biggest fixed-income fund. “It would be very difficult for Greece to pay bondholders and then turn around and say they’re cutting pensions to pay the bonds.”

Reuters reported today that the bond will be paid, citing an official it didn’t name. Greece will hold new elections after President Karolos Papoulias failed to broker the creation of a government following an inconclusive May 6 vote, Pasok leader Evangelos Venizelos said today. The Syriza party led by 37 year- old Alexis Tsipras, who favors defaulting and an end to economic austerity, is ahead in current polls.

Popular Versus Legal

The note maturing today is one of about 7 billion euros of international bonds either issued by the government or with its guarantee, whose owners are holding out for a better deal than offered under Greece’s debt restructuring. The bond swap, known as private sector involvement, inflicted losses of more than 50 percent of principal on creditors taking part.

“Deciding to repay these bonds or not is a very difficult trade-off between what is popular and what is legal,” said Athanasios Vamvakidis, head European currency strategist at Bank of America Corp. in London. “Repaying in full what are likely to be seen as mostly speculators will be extremely unpopular. Not repaying may cost more because it’s a default and will be challenged in the courts.”

Greece’s interim government hasn’t yet decided whether to pay the maturity, government spokesman Pantelis Kapsis said yesterday in an interview on Athens-based Mega TV. “It is an issue and someone must handle it,” he said. “The present government will handle it at its discretion.”

No Better Offer

Petros Christodoulou, head of the Public Debt Management Agency in Athens, didn’t reply to an e-mail seeking comment. He has previously said Greece only has funds for PSI payments and “no bondholder will get better economics than the PSI.”

Dealers don’t quote prices for the unswapped bonds because they don’t trade. Greece’s government bonds due in February 2023 trades at a record low bid price of 15.6 cents per euro to yield 27.8 percent. Payments on the bonds wouldn’t be affected by Greece defaulting on the international notes.

The yield premium investors demand to hold Greek debt rather than similar-maturity German bunds is almost 28 percentage points, suggesting holders expect a second round of restructuring or a default. The securities began trading in March at 27.8 cents on the euro at a yield of 18 percent and are now at a record 14.43 cents to yield more than 29 percent.

State of Grace

The bond documents may give Greece a month’s grace, according to London-based analysts at Barclays Capital and BNP Paribas SA. A failure to pay would give holders of at least 3.2 billion euros of other international bonds the right to demand immediate payment, according to Bank of America.

The bond terms state that an event of default occurs if the Republic fails to pay interest “and such default isn’t cured by payment thereof within 30 days from the due date.” They go on to say that a failure “in the performance of any other covenant, condition or provision set out in the notes” that isn’t resolved within 30 days constitutes a default.

Bradshaw at Pimco said he expects “on balance” that Greek officials will buy time by taking advantage of the grace period. That would postpone default to as late as June 15, by which time the nation may still not have a government.

Greece offered to swap the bonds that come due today for new ones in the PSI exchange. Holders of about 14 million euros of the original 450 million euros of notes accepted the offer, data compiled by Bloomberg show.

A default on the international bonds would be a step closer to a default on the nation’s new debt, which in turn would bring the country closer to leaving the euro, Vamvakidis at Bank of America said.

“A line in the euro zone will be crossed, as this will be the first time that a member country goes through a hard default,” he said. “The scenarios that unfold in either case are likely to increase sovereign risk in the periphery. That highlights the extreme urgency for the Greek political system to resolve the governance issues as soon as possible.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

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


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