Greek debt write-down: The era of risk-free government bonds nears its end

The big banks have opted in. Some pension and hedge funds have opted out.

Late Thursday in Athens, Greek officials will begin the final tally of a massive debt write-down to see if enough investors have agreed to participate to allow them to declare the program a successful step on the way back to solvency, receive a new round of international loans — and perhaps put the worst of their crisis behind them.

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.

In an example of the types of considerations bondholders were weighing, London investment fund manager Patrick Armstrong told Bloomberg Television he was withholding his bonds from the program on the “minuscule” chance he might still get a full payout when they mature later this month.

The likelihood of a more ambiguous outcome — enough participation to keep the process alive but not enough to declare it an outright success — means at least another day of discussion among Greece, the IMF and European officials about the possible trigger of steps to force losses on holdout investors.

Once enough bondholders participate, Greece can compel the others to do so. But the use of “collective action” clauses does carry risks. It would amount to a “credit event” that would force payouts on the bond insurance known as a credit default swap.

The amount of money involved in Greek credit default swaps is not large — a little over $3 billion — but it would be another unwelcome first for the euro zone.

A conference call is set for Friday between Greece and European leaders to discuss the debt exchange outcome.

Greece has warned it stands ready to force reluctant bondholders to participate. For a small group of investors that may be beyond the country’s reach — holders of around $10 billion in bonds issued by Greece but governed under the laws of the United Kingdom — the country warned Tuesday that it was prepared to simply stop paying them.

Market analysts say they have already braced for Greece to trigger the collective-action clauses in its bonds and don’t think it will have much impact.

The more meaningful disturbance may take time to detect — if countries such as Portugal that are also operating under international rescue programs start to rethink the painful budget cuts they have endured and wonder if they, too, should angle for a write-down.

“The statements that Greece is unique and has no implications for other countries are fatuous,” said Mitu Gulati, a Duke University law professor who has studied the Greek debt exchange. “If I am Portugal, would I . . . end up in a situation where they get to give me more austerity for a little more money,” or push for a debt write-down, too?

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