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29th November 2011

Further writedowns of Greek bonds possible

Greece is understood to be considering a cut in sovereign bonds to 25% of Net Present Value. This compares with the 40-50% that had been expected. The difference is significant to the Greek government as each percentage the value is written down represents over €2bn reduction in the national debt amount owed just from the bonds in private sector hands (Reuters calculation).


Until now the Institute of International Finance, a bank sponsored lobby group has been closely involved with the negotiations. They are thought likely to end involvement in the negotiations as they are no longer seen as adding value by either side. The Greek government has held discussion directly with some of the banks and funds holding the largest amounts of Greek bonds according to reliable sources. Some of the banks would like the Greek government to declare terms which would generate a credit incident - in other words creating an officially recognised default so that they can claim on their Credit Default Swap hedges. This would clearly help certain banks who are well hedged and think it unjust they have not been able to claim under arrangements to date. Where the burden would then fall in terms of those issuing the CDS has not been published to date.


There is another reason the attempts at 'voluntary' writedowns of Greek bonds may collapse and that is the holdings by banks and other institutions who have refused the voluntary writedown option. All involved in negotiations to date agree it would be utterly wrong if those not agreeing to the voluntary writedown were still to be paid out 100% at the end of the process.


A precedent has been set by Ireland with bank bonds. Most bonds require a significant majority of bondholders to vote for any change to the payout rules. Bondholders were given the choice of accepting a figure often around 20% of the value by means of an exchange or to face having a value imposed that was a fraction of 1%. Ireland got its majorities in favour and all legal actions against the arrangements failed. Greece, like Ireland, would have to pass emergency laws in order to make this possible.