Disappearing debt trick

Eurozone finance ministers will club together for a telephone conference call this Friday to weigh in and discuss the next debt 'haircut' for Greece.

The day before in Athens, the so-called book of the willing - comprising a list of banks, insurers, and other financial institutions willing to take part - will close.

In the past few days, the Greek finance ministry has written to every investor holding Greek government bonds and offered to exchange the old bonds for new ones. If an old bond was worth 100 euro (130 US dollars), it would be converted into a number of new bonds with a total value of 46.50 euro. At the same time, the life of each bond would be extended to up to 30 years and the interest rate lowered. In theory, the decrease in value could be as much as 70 percent for investors. And to make the swap more attractive, the European rescue fund, the European Financial Stability Facility (EFSF), will act as guarantor for 15 percent of the new bond - rather than the Greek government itself. That's why euro finance ministers need to agree.

Magic number 60 percent

The Greek finance minister Evangelos Venizelos wants to do a cash check in the night from Thursday to Friday to calculate whether the necessary participation of creditors can be achieved. According to Greek law, if 60 percent of private creditors participate, the rest could be forced to take part themselves. Those "unwilling" to take part face a threat of worse conditions, and with it, higher losses.

But the Greek finance minister would rather it didn't come to that. Evangelos is aiming for 90 percent participation to enable him to declare the haircut voluntary. If the participation stalls at 60-90 percent, the so-called credit default swaps, which banks have agreed to in case of a Greek default, will become due.

National bankruptcy still looms

If, on the other hand, less than 60 percent participate, it would mean the biggest debt cut in history had failed. The Institute of International Finance (IIF) estimates that a resulting disorderly Greek bankruptcy would cost one trillion euros. That's according to a secret report, cited by the Greek newspaper "Athens News."

The German finance minister, Wolfgang Schäuble, remains optimistic.

"My prognosis is that a majority of creditors will accept the offer," said Schäuble in an interview with Bavarian television.

But the head of the banking group KfW, Ulrich Schröder, said earlier this week that he feared Greece would fall short of the all-important 60 percent hurdle.

"It's a relatively big concern that Greece will fail the 60 percent mark," Schröder told finance reporters in Frankfurt. "I'd be happy if I was wrong."

In an internal report, analysts from the EU Commission, International Monetary Fund (IMF) and the European Central Bank say that they believe Greece will fail to achieve a voluntary debt cut, meaning the 90 percent mark will not be reached.

However, Olli Rehn, the EU Commissioner responsible for currency issues and the economy, has joined Schäuble in his optimism. Rehn told the French newspaper "Le Figaro" that there was evidence that the debt cut would happen "without a hitch, because the situation remains interesting for the private sector."

Weekend exchange

Banking group KfW says it will take part in the debt cut - as will other large German private banks. The biggest portion of Greek government bonds, meanwhile, is held by Greek banks, pension funds and health insurers, who have held talks with the Greek finance ministry and said they too will tag along.

The situation is not so clear among other investors. But if all things go to plan, the exchange will take place over the weekend so that by the time the markets open on Monday, Greece's debt cut will be perfectly placed. The Greek debt would drop nominally by 107 billion euros. It's currently running at 350 billion euros.

But that's not all.

Next Monday, euro finance ministers will again turn their attention to Greece because Greek banks themselves will need fresh funds to survive the debt cut. The Greek government hopes to tap these new funds from the EFSF. But the ratings agency Moody's says that means Greek banks will effectively have lost their entire equity.

Moody's estimates the banks will need about 40 billion euros to survive. And that means the national debt cut - if successful - will be closely followed by new moves to rescue the banks.

What remains unclear is how the markets will react on Monday. Greek government bonds and Greek banks could come under pressure.

Author: Bernd Riegert / za
Editor: Gregg Benzow