March 9 (Bloomberg) -- Greece pushed through the biggest sovereign restructuring in history after cajoling private investors to forgive more than €100 billion ($132 billion) of debt, opening the way for a second bailout.
Euro-region finance ministers agreed on a conference call that the swap meant Greece had met the terms to proceed with a €130 billion rescue package designed to prevent a collapse of the Greek economy. Ministers freed up €35.5 billion in public sweeteners and interest now, with a decision on the balance to be made at a March 12 meeting in Brussels.
“It would be a big mistake to think we are out of the woods,” German Finance Minister Wolfgang Schaeuble told reporters in Berlin after the call today. “We have a chance of making it. And we have to seize that opportunity.”
Stocks rose while the euro fell after the government in Athens said it will trigger an option forcing some investors to take part in the exchange. Officials from the International Swaps and Derivatives Association called a meeting today to consider a “potential credit event” relating to Greece.
Investors with 95.7 percent of Greece’s privately held bonds will participate in the swap after so-called collective action clauses are triggered, the Finance Ministry said. Bondholders tendered €152 billion of Greek-law bonds, or 85.8 percent, and €20 billion of foreign-law debt. Greece extended its offer to holders of non-Greek law bonds to March 23, after which sweeteners will no longer be available.
The result was “very strong and positive,” said Josef Ackermann, chairman of the Washington-based Institute of International Finance, which led negotiations with the Greek government on behalf of private bondholders. “These are important steps towards resolving the Greek debt crisis, addressing the overall fiscal and sovereign debt problems in the euro area, and restoring financial stability.”
Even with steps taken toward the goal of the exchange, to reduce the €206 billion of privately held Greek debt by 53.5 percent, Greece faces hurdles ahead. Europe’s most indebted nation will be saddled with a debt level of 120.5 percent of gross domestic product by 2020 under current targets. The Greek government must continue to meet the terms laid down by its international creditors to receive aid payments at three-monthly intervals. Elections due in April or May might still upend adherence to the measures demanded.
With Greece now in a fifth year of recession, Prime Minister Lucas Papademos’s government had said that it was ready to force holders of Greek-law bonds into the swap. The use of collective action clauses may trigger $3 billion of insurance payouts under rules governing credit-default swap contracts.
Greek Finance Minister Evangelos Venizelos said that participation “surpassed expectations” and he would recommend to Cabinet the authority to activate collective action clauses.
“This is a dangerous precedent that has been set,” John Wraith, fixed-income strategist at Bank of America Merrill Lynch, said in an interview on Bloomberg Television’s “Countdown” with Linzie Janis and Owen Thomas. For Greece, “yes, it is probably necessary, but it is just another hurdle crossed rather than some sort of solution.”
The euro weakened for the first time in three days, dropping 0.9 percent to $1.3156 as of 2:45 p.m. in Berlin. The Stoxx Europe 600 Index gained 0.6 percent to 265.61.
“There was a small possibility that for whatever reason, the participation would be so high that the CACs may not need to get triggered,” Pawan Malik, managing director of Navigant Capital, said in a Bloomberg Television interview. “For the markets this may be a mild negative today.”
The writedown is a key element in European leaders’ efforts to turn the tide against the crisis that first emerged in Greece in late 2009, then forced Ireland and Portugal to follow Greece in requiring bailouts.
Germany and France, Europe’s two biggest economies that have steered the euro-area’s response to the crisis, welcomed the debt-swap take-up. The swap was a “great success” and “good news,” and “hits all the objectives we set ourselves,” French Finance Minister Francois Baroin said on RTL Radio.
Chancellor Angela Merkel is “pleased” about the “high level of participation of private creditors,” Steffen Seibert, her chief spokesman, said in Berlin. It is “an encouraging result that will help put Greece on a path to stability. What’s important now is for Greece to seize the opportunity offered by this debt swap, meaning it implements the agreed programs.”
Greece’s largest banks, most of the country’s pension funds and more than 30 European banks and insurers including BNP Paribas SA and Commerzbank AG, had said they would agree to the offer before it closed yesterday at 10 p.m. Athens time.
In the exchange, investors will receive new bonds with a face value of 31.5 percent of the old ones together with notes from the European Financial Stability Facility. The new debt is governed by English law and comes with warrants that will provide extra income in years when Greek economic growth exceeds thresholds. The net present value loss for investors is more than 70 percent.
“Despite all the justified happiness about this issue we have to note that Greece is only buying time,” Michael Kemmer, general manager of the BdB Association of German banks, said in an interview with Deutschlandfunk radio. “This is an important step -- the private sector showed solidarity. That’s good, but the work has only just begun.”