Cool reception for Greek debt plan

By Richard Milne and David Oakley

One game of chicken is over in the eurozone but another is just beginning.

The first ended with Germany backing down over its demands on how private creditors should be involved in a new Greek bail-out, handing a victory of sorts to the European Central Bank and France.

No special status for new eurozone bonds - Jun-20.Eurozone delays €12bn loan for Greece - Jun-20.Papandreou pleads for unity to tackle crisis - Jun-19.Eurogroup statement on Greece - Jun-20.Venizelos aims to push through Greek reform - Jun-19.Analysis: Greece in turmoil - Jun-17..But the latter duo’s preference for a so-called voluntary rollover of Greek debt means a new game of chicken will take place between bondholders and authorities.

A rollover would see investors encouraged not to cash out when their bonds mature but to buy new, longer maturing bonds.

Investors and strategists say that the outcome of this game is less likely to go the way of the European authorities.

They expect that only the banks – which are estimated to own about a quarter of Greek sovereign debt – will agree to a rollover.

“I can’t see why anybody would want to roll over a Greek bond if they had a choice,” says Gary Jenkins, head of fixed income at Evolution Securities. “I can’t see private investment funds being willing to do this. It would only be French, German and Greek banks who might do so as they would be leant on.”

He uses the example of five-year bonds maturing at the end of August to show how it makes no commercial sense to agree to a rollover.

Such a five-year bond, maturing on August 20, pays a coupon of 3.9 per cent yet current secondary market prices show five-year Greek bonds trading at a yield of 19.96 per cent.

In other words, unless investors are offered new bonds at a coupon of a similar level to current yields close to 20 per cent, it makes little commercial sense to reinvest into Greek debt.

Greece and its European and international rescuers are highly unlikely to want to pay such high rates.

Documents prepared by the European Commission to discuss how a rollover could work suggest that any new bonds would likely be between five and seven years in length and “preserve low coupons”.

The Commission outlines two options for how a rollover could proceed.

The first is for an informal and decentralised operation in which “moral suasion alone” is used to get bondholders to participate.

The second is for a more formal process in which Greece would announce the rollover and bondholders would commit publicly through letters as to how much they would buy in new bonds.

The plan has come to be known as “Vienna Plus”, a reference to the initiative in 2009 under which banks agreed to maintain their exposure to eastern Europe.

But some bankers involved in discussions on a Greek restructuring point out that the original Vienna Initiative applied to loans, not bonds.

The latter are far more widely held than bank loans, making it difficult both to target all bondholders and to be sure that they will abide by their commitment when their bonds mature in the next three years.

“I’m concerned about the certainty aspect – the market may not take a rollover seriously, which could lead to the risk of contagion,” says one banker, who admits that banks would be less likely to earn fees from a rollover compared with the other main option, a maturity extension.

Another danger in any rollover process is the reaction of the credit rating agencies. Standard & Poor’s and Moody’s, the two biggest, have both raised doubts over whether a rollover could be considered truly voluntary and instead should be considered a “selective default”.

Philip Poole, global head of macro and investment strategy at HSBC Global Asset Management, says: “Some funds may be forced sellers of Greece in the event of a default [even by just one agency]. This is because some funds have mandates that do not allow them to hold defaulted bonds or debt.” He warns that such a sell-off of Greek bonds could lead to contagion as countries such as Spain and Italy – big economies that would stretch bail-out funds to the limit – are sucked into the crisis.

A further complication is that the ECB suggested it would stop banks using Greek debt as collateral if the country is downgraded to default, which would be a massive blow to domestic financial services. Fitch, the third-largest rating agency, appeared to offer a get-out clause to the ECB last week by saying that it could downgrade Greece itself to default but not the individual bond issues.

In summing up the debate over the rollover, the banker involved in the discussions says: “It is a good time to ask banks to do you a favour with all the regulatory discussion, so I think the main ones will roll over.

“Whether that is enough to make any difference, I have my doubts.”

Copyright The Financial Times Limited 2011.