Greece kicked off plans Friday to slash its outstanding debts by more than 50 percent, even as a top credit-rating company warned that aspects of the deal could further destabilize Europe’s government bond markets.
In what the International Monetary Fund has billed the largest debt restructuring ever, the Greek Finance Ministry posted its offer to investors on a Web site set up to manage the massive bond exchange. Under the terms of the deal, existing Greek bonds can be swapped for a new 30-year note worth 31.5 percent of the face value, plus a second short-term security worth another 15 percent that is backed by the entire euro zone and meant to be as good as cash.
Greek officials hope private investors will voluntarily accept a steep write-down in the value of their bond holdings to avoid even worse losses if the country were to default.
If enough investors participate, the exercise would reduce the beleaguered country’s outstanding debts by as much as $130 billion and help clear the way for a $170 billion package of new loans from the rest of Europe and the IMF. If the bond exchange falls short, the new international loans will be in doubt, and Greece’s economic crisis would intensify — with a government default likely by late next month.
About 90 percent of Greece’s outstanding $260 billion in privately held bonds will need to be included in the bond exchange for the deal to move forward, according to the terms announced by the Greek Finance Ministry. Although the debt swap is meant to be voluntary, Greek lawmakers in recent days changed the law to require that holdout investors be forced to participate if a majority of investors, representing two-thirds of the outstanding bonds, agree to the exchange.
The terms of the debt swap have been carefully negotiated in recent weeks between Greek authorities and a committee representing banks, pension funds and other large investors that hold the bulk of the country’s outstanding debts.
Charles Dallara, managing director of the Institute of International Finance and a lead negotiator for the investors, said he was confident the debt swap would succeed.
“We remain quite optimistic that once investors study this proposal . . . there will be high take-up,” said Dallara, who is in Mexico for this weekend’s meetings of finance ministers from the Group of 20 major world economic powers.
Topping the G-20 agenda are the situation in Greece and the broader financial crisis facing Europe. Officials from the United States and other non-European powers are expected to continue to pressure France, Germany and other euro-zone nations to bolster their own crisis-fighting efforts — and not to expect outside help from the IMF or elsewhere.
The Greek debt exchange is on a tight timetable. It needs to be completed before a major bond payment comes due next month, and in time for European and IMF officials to review the results and see that it has achieved enough savings for them to move ahead with their promised loans to the country.
In a related analysis, the Standard & Poor’s credit-rating agency said that recent steps taken by Greece to prepare for the debt exchange may worsen conditions for other European governments.
The deal exempts from losses some $80 billion in Greek bonds accumulated by the European Central Bank in the early days of the country’s crisis. In effect, S&P argued, that has created a new class of government bonds throughout the euro zone and could in turn discourage investors from buying bonds issued by countries such as Italy or Spain. The ECB also has been trying help these countries by buying their bonds and would presumably also enjoy a similar priority in avoiding losses if each country has trouble making its payments in the future.
The ECB’s protection from losses in Greece has made it a “super-senior creditor,” S&P said in a news release, and pushed other bondholders toward the back of a lengthening line of governments, international agencies and other priority lenders. The IMF has also warned of the situation, saying it could make private investors wary of Greece even if the country’s economy and finances improve.