Greek deal disrupted by bondholders gambling on default

It is also impossible to gauge how much of this ‘bond migration’ has taken place since the PSI negotiations began last year – because of  a lack of transparency on the markets – according to Sony Kapoor, the managing director of economic think tank Re-Define.

Lead negotiators Charles Dallara and Jean Lemierre – co-chairs of the steering committee of the Institute of International Finance (IIF), an industry body representing private investors – left Athens on Friday (13 January), claiming other parties to the agreement could not meet their terms.

Conflict among bondholders

The deal on the table involves persuading creditors to turn in their bonds and receive new ones that have half the face value and mature many years in the future. The Greek authorities say €206 billion of bonds are subject to the exchange; if all the creditors agree, they’d get €103 billion in new bonds back.

But there is a conflict between those bondholders – represented in the negotiations by the IIF – who are serious about accepting a voluntary write-down, and others betting on a default.

The conflict was referred to by Peter Sutherland, a former EU competition commissioner (1985-1989), speaking at a European Policy Centre seminar on Monday (16 January).

Sutherland said that private bondholder involvement in the PSI deal was ‘absolutely key’ because some noteholding institutions also hold credit default swaps as an insurance against Greek insolvency, and therefore “have an interest in the default of Greece”.

Kapoor said that the interests of bondholders who are hoping to free-ride on a voluntary agreement [some of whom hold credit default swaps] – is irking the bondholders willing to participate in the agreement, and was a major reason for the breakdown in negotiations last week.

“It is a classic collective action problem,” he said. “Collectively a voluntary agreement is in the interests of some of the bondholders. But if 90% of bonds were volunteered and 10% did not, Greece is not likely to default and these 10% may have a bumper payoff,” Kapoor added, explaining why those willing to join  the agreement are exasperated with the others.

Dallara and Lemierre will return to Athens

A spokesman for the IIF refused to comment to EurActiv on speculation that bonds were migrating in significant numbers to institutions hedged with credit default swaps. The spokesman said: “The first priority now for the negotiators representing major institutional investors is to see if it is at all possible to do a deal. If there is one, then the next phase is to see if as many as investors as possible can participate.”

IIF negotiators Dallara and Lemierre confirmed yesterday (17 January) that they will return to Athens today to resume discussions with the Greek government.

Meanwhile, the Fitch ratings agency announced Tuesday that Greece would default on its debt, although it said that such a default was likely to take place in an orderly manner.

“It is going to happen. Greece is insolvent so it will default,” Edward Parker, the managing director of Fitch's sovereign group for Europe, the Middle East and Africa told Reuters on the sidelines of a conference in Stockholm.