Greece on Tuesday threatened to default on payments to any bond investor that doesn’t participate in a debt restructuring that is central to international plans for a rescue of the ailing country.
Greece is asking banks, pension companies, hedge funds and others that hold about $260 billion in Greek bonds to trade them for new notes worth less than half the face value and carrying low-interest terms meant to make the country’s situation sustainable.
The deadline for investors to accept the debt swap is Thursday. If the effort falls short of its goal of roughly 90 percent participation, it could jeopardize new international loans for the country and put Greece at risk of a more damaging general default on all of its outstanding bonds.
In a statement issued after conferring with banks at a meeting in Frankfurt, Germany, Greece’s Public Debt Management Agency cautioned investors that no money was available to continue bond payments to any investor that doesn’t agree to the swap.
“Greece’s economic programme does not contemplate the availability of funds to make payments to private sector creditors that decline to participate,” the agency’s statement said.
Although the debt swap is ostensibly voluntary, Greece has taken an increasingly hard line. It inserted new clauses in many of its bonds allowing a majority of bondholders to force an exchange on the others — essentially giving a consortium of large banks and pension funds the power to invoke “collective action clauses.”
The Tuesday statement is another step to discourage holdouts — particularly among investors that hold a few billion dollars worth of Greek bonds that are governed by the more investor-friendly laws of the United Kingdom. The contractual language included in government bonds can specify which nation’s courts have jurisdiction in any dispute.
Analysts say that hedge funds and other aggressive investors may have bought bonds at a steep discount hoping for a full payout on the face value — and may have a particular incentive to hold out if the bond matures soon.
Until now, Greece’s international rescue program has allowed it to honor all of its bond payments, and tens of billions of dollars in loans from the International Monetary Fund and the rest of Europe have been used to pay off the banks and others that had loaned Greece money.
But the agency’s statement made clear the high stakes. If enough investors don’t participate, the country’s international loans will fall through and it will have to restructure its bonds anyway — most likely through a default, and without some of the “sweeteners” included in the current deal, such as an upfront cash payment and the promise of better terms if Greece’s economy improves.