Greek Deal May Add Sweetener

Bondholders negotiating a debt swap with Greece may get a sweetener tied to a revival in economic growth that would ease the impact of accepting a lower interest rate on the new bonds, people with knowledge of the talks said.

In discussions late last week in Athens, creditors lowered their demands for an average coupon on the new 30-year securities they would receive to as little as 3.6 percent from 4.25 percent after European officials demanded they take steeper losses, people familiar with the matter said at the time.

While the lower coupon would lead to an estimated loss of 70 percent or more for investors, adding a so-called gross domestic product warrant — which would pay bondholders more if the Greek economy rebounds — would trim the loss in net present value terms by an estimated 0.5 to 3 percentage points, said two people, who declined to be identified because the talks are confidential.

“It's like a concession from the Greek government, so it's something that presumably smoothed negotiations,” said Matthew Czepliewicz, a London-based bank analyst at Collins Stewart Hawkpoint Plc. “When you are in the middle of turmoil you're going to be conservative, and bank investors are unlikely to attribute any value to these warrants, even if they could prove valuable in the future.”

Greece and private creditors are near an accord that would in principle include the warrants, the people said. As an additional inducement for creditors, the debt would probably be governed under U.K. rather than Greek law, providing more bondholder protection, people familiar with the situation said.

These matters may still change, and questions over whether Greece can fulfill conditions for a second aid package from the European Union and International Monetary Fund have put the accord on hold for the moment, they said.

The Greek government is “one step from closing” a debt- swap deal with its private bondholders, Finance Minister Evangelos Venizelos told reporters in Athens yesterday. The sides are close to completing a voluntary exchange within a framework outlined by Luxembourg Prime Minister Jean-Claude Juncker, the Washington-based Institute of International Finance, which is negotiating on behalf of creditors, said last week.

Talks with EU and IMF officials on a new financing package for Greece must be completed by Feb. 5, Venizelos also said at a Parliament hearing. A private-creditor debt swap, for which a public offer must be made by Feb. 13, can only proceed after a deal on the loan package is sealed, he said.

Debt Exchange

EU leaders on Jan. 30 held their 16th summit in the two years since the Greek debt emergency provoked a Europe-wide crisis, leading to aid packages for Greece, Ireland and Portugal. Greece pledged a last-ditch effort to prevent the collapse of its second rescue package from creditors, aiming to complete talks this week on a financial lifeline that's been in the works for six months.

Prime Minister Lucas Papademos said in Brussels he would try to meet German-led demands for a bigger debt writedown by investors and deeper budget cuts by his government.

Greece and its creditors are seeking to seal a debt-swap deal three months after private bondholders agreed to a 50 percent cut in the face value of more than 200 billion euros ($262 billion) of debt by voluntarily exchanging bonds for new securities.

The aim is to reduce Greece's debt burden to 120 percent of GDP in 2020 — an objective complicated by a deepening economic contraction. An accord is tied to the second bailout for the country, which faces a 14.5 billion-euro bond payment March 20.

After two years of wage cuts and tax increases, the Greek economy was expected to shrink about 6 percent last year, according to the latest IMF estimates, compared with a forecast of 3.8 percent made in June.

Bloomberg News

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