It is an epochal moment, the formal end of an era in which the debts of sovereign governments in the developed world were regarded as virtually risk-free and relied on as a benchmark investment as safe as cash. Greece, with its request that bondholders accept losses in excess of 50 percent, has proved that is not the case, and the full ramifications have yet to become clear as the European financial system struggles to readjust.
It is a moment that officials at the European Central Bank and elsewhere in the 17-nation euro zone fought mightily to avoid, for fear of the stigma, but that became inevitable as Greece’s problems deepened. In the end, the country had little choice but to take a route more associated with developing economies than with major currency areas like the euro and ask its investors to accept steep losses or risk being totally wiped out in a general default.
In Athens, Greek Finance Minister Evangelos Venizelos, the former defense minister who has taken over his country’s battle with the bond markets, the International Monetary Fund and the rest of Europe, said he was confident the debt exchange would attract enough participants to succeed.
“We will give an active response to the Cassandras that are trying to invalidate every possible solution” to Greece’s problems, Venizelos said, invoking the Greek legend of the cursed prophetess.
The outcome of the debt exchange is critical to the success of a new international rescue program for the country. A three-year package of loans from the rest of Europe and the IMF is premised on nearly all of Greece’s private bondholders agreeing to trade their existing bonds for new ones worth less than half as much. That would enable Greece to wipe away much of its $270 billion in outstanding, privately held debts.
The option for bondholders to participate voluntarily expires at 10 p.m. Thursday in Athens.
On Wednesday, enough investors had publicly declared their support that the program seemed likely to avoid a worst-case outcome. Greece has said that if participation does not top 75 percent of the outstanding bonds, it will not proceed with the exchange — meaning it would probably face a general default this month.
A consortium of banks, pension funds and hedge funds that negotiated the debt exchange with Greece announced Wednesday that its members would participate — representing about 40 percent of the country’s outstanding privately held debt. Other major pension funds in Greece and individual banks also pledged support, bringing the announced total to more than 50 percent.
But there were some holdouts — including a few Greek-based pension funds that Venizelos criticized for risking the country’s future. Given the competing interests, possibilities for gamesmanship and different investment strategies in play, many analysts feel it is unlikely that Greece will reach its upper-end goal of 90 percent participation — the level at which it guaranteed the swap would move forward.