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Forced deal?

March 9, 2012

Greece's successful debt swap which clears the way for a new bailout package has sparked relief in Europe. But some experts remain skeptical, saying the deal isn't entirely voluntary.

A headless statue at the Acropolis in Athens
The do-or-die debt swap deal inflicts heavy losses on private investorsImage: picture-alliance/dpa

Greece is struggling under a crippling mountain of public debt amounting to around 350 billion euros. Out of that, a total of 206 billion of Greek national debt is in private hands, including banks, insurance companies, hedge funds and private investors. Now, 85.8 percent of those private lenders have accepted a nominal loss of 53.5 percent on their Greek bond holdings.

It might seem like a generous gesture but it masks a deep-seated fear among bondholders that they could stand to lose all their money in case of a disorderly default by the Greek government.

That danger has been quelled for now. But participation in the debt swap deal still wasn't high enough for the Greek government which was aiming for a target of over 90 percent that would have allowed the swap to be completed on a voluntary basis without the use of legal force.

Athens announced on Friday that it now plans to trigger legal powers to force holdouts – mainly state-controlled Greek pension funds - to join.

A forced Greek 'haircut'

It might sound like a less-than-polite way to deal with investors but experts say that the embattled Greek government has no choice.

"It's necessary because if a second bailout package is to be secured, you have to be able to cut debt by 106 to 107 billion euros," Ralf Umlauf, financial market strategist at the Helaba Landesbank Hesse-Thuringia told DW. And that, he said, is only possible if over 90 percent of Greek bondholders participate.

Ralf Umlauf, Expert at the Helaba, Landesbank Hessen-Thüringen
Ralf Umlauf says the deal will help reduce Greece's mountain of debtImage: Helaba

In other words, without a sufficient participation of private creditors, Greece cannot hope to get its hands on a second international bailout package. That has forced the government in Athens to activate the "collective action clauses" legislation. The law was passed by the Greek parliament at the end of February.

Not as bad as feared

The International Swaps and Derivatives Association will meet later on Friday to determine whether the deal would be deemed a credit event - a technical default – triggering the payment of insurance. For months, euro zone politicians said they wanted to avoid just such a situation.

"Originally, it was assumed that it would trigger the payment of credit default swaps (CDS) which is essentially insurance against a default," Umlauf said. Earlier, European politicians were worried that a payout of CDS would destabilize financial institutions that sold them, he added.

However since then, a CDS payout has started to look less threatening. Many European experts now believe that overall payouts linked to insurance-like contracts governing Greek sovereign debt will be about $3 billion, significantly less than feared, and are unlikely to rattle financial markets.

Heavy losses

Several economists and analysts are relieved that market principles have remained untouched in the affair.

"Otherwise there would be huge question marks about the CDS market," Ralf Umlauf said. "What sense would it make to pay premiums if in the case of a default, the insurance wouldn't be paid."

The Greek parliament
The Greek parliament could activate legislation to force the deal on holdoutsImage: AP

So a small number of investors will see their heavy losses of Greek bonds sweetened with an insurance payout. But most private creditors will take a total loss of up to 74 percent on their Greek bond holdings. They are to swap their old bonds for newly-issued ones worth a lot less, with less interest and with longer maturities of up to 30 years.

Deal could lift Greece out of debt spiral

Though the debt swap deal will inflict pain on private creditors, experts believe the step can help lift Greece out of its downward spiral by reducing its debt burden to 250 billion euros.

"That's roughly equivalent to debt levels before 2007," Folker Hellmeyer, chief analyst at the Bremer Landesbank, told DW. "But since then, we've pushed through massive reforms. And that has largely eliminated the structural aspects of the deficit," he said.

Hellmeyer has called for nothing short of a Marshall plan for crisis-riddled Greece to stimulate growth. Above all, the administration's efficiency must be raised, he said.

"I recommend the Greek government to accept the offers made by German Finance Minister Wolfgang Schäuble to temporarily hire experts from Germany," Hellmeyer said, adding that could set Greece on a sustainable path to growth.

Author: Zhang Danhong /sp
Editor: Neil King