IIF warns Greek bondholders over trillion euro default risk | Business| Economy and finance news from a German perspective | DW | 06.03.2012
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IIF warns Greek bondholders over trillion euro default risk

The Institute of International Finance (IIF) has urged Greek creditors to participate in a debt swap or face a trillion-euro ($1.3 trillion) loss if Greece defaults. The IIF wants to keep a lid on contagion.

pair of scissors cutting 100 euro note


In an IIF document marked "confidential" but obtained by news agency Reuters, the financial sector group sees "damaging ramifications" emerging from a "disorderly Greek default" in the wake of an unsuccessful bond swap operation.

Greek private creditors have until Thursday night to step forward and participate in a debt swap worth 107 billion euros ($141 billion), which is a key part of the eurozone bailout package for debt-laden Greece.

"It's difficult to add all the contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion euros," the document quoted by Reuters said.

On Tuesday, Greek Finance Minister Evangelos Venizelos was forced to deny rumors he was planning to extend the deadline in efforts to win over more private creditors. Officially, Greece needs 90 percent participation for the bond swap to go ahead.

Contagion alarm

The IIF - representing 420 global financial institutions - said in the document that the European Central Bank (ECB) would be severely hit if the Greek deal fell apart, because it would have to take losses of 177 billion euros – well over 200 percent of the ECB's capital base.

In addition, both Ireland and Portugal would need outside help of around 380 billion euros to shield against the fallout of a Greek default, the IIF estimated.

"Substantial support for Spain and Italy to stem contagion there," would cost another 350 billion euros, the document said.

And finally, banks exposed to Greek sovereign debt would face "massive recapitalization costs" that could "easily hit 160 billion euros."

Analysts believe the IIF document may have been designed to alarm investors into participating in the debt exchange.

"The most likely outcome may well be that Greece passes its [own] 75 percent target and then uses CAC to ensnare the remainder," Gary Jenkins, analyst at Swordfish Research, told Reuters.

Collective Action Clause (CAC) is a piece of legislation adopted by the Greek parliament in February and is aimed at forcing reluctant creditors to participate in the bond swap.

About a quarter of privately-held Greek debt is estimated to be in the hands of hedge funds and other high-risk investors. Their intentions are unclear and analysts expect them to leave a decision until the very last minute.

uh/nk (Reuters, dpa)