LONDON (Reuters) - Greece must persuade its creditors to take a hefty loss on their investments in order to unlock the aid money it needs to stay afloat, but talks are proving tough, making a messy default in March a real prospect.
The struggling sovereign, also racked by a five-year-old recession, must strike a deal to reduce its towering debt stock by 100 billion euros to continue receiving bailout money from its European partners and the International Monetary Fund.
But private creditors are baulking at current proposals. Bondholders are thought to be a mix of mainly European banks, wincing at the prospect of further writedowns on their loans, and hedge funds who bought the bonds cheaply and are looking to maximize their return.
Sovereign wealth funds, insurers and Greek pension funds also hold Greek debt. Around 206 billion euros of bonds are considered eligible for the deal, meaning debtholders are facing a minimum writedown of 50 percent providing they all take part.
The European Central Bank has significant holdings but is not considered a private creditor and has said it is not involved in the negotiations.
The talks are likely to result in a default by some definitions. For a factbox on different interpretations of default, see:
Below are some of the possible outcomes of the talks:
GREECE SECURES A VOLUNTARY DEAL
If Greece can reach a deal with creditors on terms of a debt restructuring, private creditors will voluntarily swap their Greek bonds for new ones worth around half their original value.
If the deal is to unlock aid funding and remain strictly voluntary, Greece needs to win the support of enough bondholders to reduce its debt stock by the required 100 billion euros.
This would still be treated as a type of default by rating agencies, but would avoid a damaging uncontrolled default.
With financial markets skeptical a voluntary deal will be reached, this would be taken as a positive and could prompt investors to buy riskier assets such as stocks at the expense of traditional safe havens like German government bonds.
The euro - a bellwether of sentiment towards the currency bloc as a whole - was also likely to rise, with some analysts looking at a return to $1.30 against the dollar from its current levels around $1.29.
However, positive sentiment was likely to be limited in scope by the multitude of euro zone problems left unresolved.
A voluntary deal that is not binding on all holders of the debt is not likely to trigger payment of the $3.22 billion of outstanding credit defaults swap (CDS) -- insurance contracts designed to protect against a default.
GREECE SQUEEZES HOLD-OUTS
If Greece cannot persuade enough bondholders to sign up to the offered terms on a voluntary basis, it could turn to legal options to force those resisting a deal to swap their bonds.
Greek Prime Minister Lucas Papademos has said he would consider introducing legislation to squeeze hold-outs into taking losses.
Such laws are commonly known as collective action clauses (CACs) and rely on the support of a defined portion of bondholders agreeing to a deal, which would then be enforced for all creditors.
Bond markets could take such an outcome as a blueprint for similar action in Portugal and possibly Ireland, sending those countries' bond yields higher.
Nevertheless, with a messy default off the table, the euro was expected to see an initial positive reaction. This may, analysts said, give way to longer-term structural concerns about the integrity of the currency bloc.
Adding the CAC to bonds would probably not trigger a payment of CDS contracts, but activation of the clause was thought highly likely to lead to a payout.
TALKS END WITH NO AGREEMENT
If the talks breakdown without any consensus, Greece faces a slide towards a messy default with the repayment of a 14.5 billion euro bond looming on March 20.
Greece does not have the money to repay bondholders, leading to a disorderly default - the outcome markets fear the most and one which may force Athens to abandon the common currency.
This outcome would threaten the highly inter-connected global banking system and many analysts say a wave of contagion larger than that seen in the wake of the 2008 Lehman Brothers collapse could be set in motion.
The resulting flight towards low-risk assets would benefit highly liquid government bonds, such as German Bunds and U.S. Treasuries, pushing yields sharply lower. Some forecast 10-year German yields could sink to 1 percent from their current 1.8 percent.
The euro could extend its recent slide towards $1.20, levels not see since the Greek crisis first peaked in June 2010. Shares in French banks, heavily exposed to Greece, were seen falling.
Holders of CDS contracts would be paid out in the event that Greece failed to repay the bond.
LAST-MINUTE RESCUE
The closer the March 20 deadline, the more likely a potentially disastrous disorderly default becomes.
The threat of this doomsday scenario could persuade international lenders to give Greece the money to repay its March bond.
The International Monetary Fund has requested internal approval to start talks with Greece on "exceptional access" to the Fund.
However, a last-minute rescue would reward speculative investors who bought Greek debt at deep discounts with a full payout - an outcome analysts believe would face strong political resistance.
Under this scenario, financial markets, cautious about the prospect of an unprecedented euro zone sovereign default, would trade in a volatile fashion with sentiment hinging on any signs that a deal was going to be reached.
Safe-haven assets such as German Bunds were likely to be in high demand but susceptible to sharp sell-offs if a rescue was suddenly seen to be in the offing.
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The struggling sovereign, also racked by a five-year-old recession, must strike a deal to reduce its towering debt stock by 100 billion euros to continue receiving bailout money from its European partners and the International Monetary Fund.
But private creditors are baulking at current proposals. Bondholders are thought to be a mix of mainly European banks, wincing at the prospect of further writedowns on their loans, and hedge funds who bought the bonds cheaply and are looking to maximize their return.
Sovereign wealth funds, insurers and Greek pension funds also hold Greek debt. Around 206 billion euros of bonds are considered eligible for the deal, meaning debtholders are facing a minimum writedown of 50 percent providing they all take part.
The European Central Bank has significant holdings but is not considered a private creditor and has said it is not involved in the negotiations.
The talks are likely to result in a default by some definitions. For a factbox on different interpretations of default, see:
Below are some of the possible outcomes of the talks:
GREECE SECURES A VOLUNTARY DEAL
If Greece can reach a deal with creditors on terms of a debt restructuring, private creditors will voluntarily swap their Greek bonds for new ones worth around half their original value.
If the deal is to unlock aid funding and remain strictly voluntary, Greece needs to win the support of enough bondholders to reduce its debt stock by the required 100 billion euros.
This would still be treated as a type of default by rating agencies, but would avoid a damaging uncontrolled default.
With financial markets skeptical a voluntary deal will be reached, this would be taken as a positive and could prompt investors to buy riskier assets such as stocks at the expense of traditional safe havens like German government bonds.
The euro - a bellwether of sentiment towards the currency bloc as a whole - was also likely to rise, with some analysts looking at a return to $1.30 against the dollar from its current levels around $1.29.
However, positive sentiment was likely to be limited in scope by the multitude of euro zone problems left unresolved.
A voluntary deal that is not binding on all holders of the debt is not likely to trigger payment of the $3.22 billion of outstanding credit defaults swap (CDS) -- insurance contracts designed to protect against a default.
GREECE SQUEEZES HOLD-OUTS
If Greece cannot persuade enough bondholders to sign up to the offered terms on a voluntary basis, it could turn to legal options to force those resisting a deal to swap their bonds.
Greek Prime Minister Lucas Papademos has said he would consider introducing legislation to squeeze hold-outs into taking losses.
Such laws are commonly known as collective action clauses (CACs) and rely on the support of a defined portion of bondholders agreeing to a deal, which would then be enforced for all creditors.
Bond markets could take such an outcome as a blueprint for similar action in Portugal and possibly Ireland, sending those countries' bond yields higher.
Nevertheless, with a messy default off the table, the euro was expected to see an initial positive reaction. This may, analysts said, give way to longer-term structural concerns about the integrity of the currency bloc.
Adding the CAC to bonds would probably not trigger a payment of CDS contracts, but activation of the clause was thought highly likely to lead to a payout.
TALKS END WITH NO AGREEMENT
If the talks breakdown without any consensus, Greece faces a slide towards a messy default with the repayment of a 14.5 billion euro bond looming on March 20.
Greece does not have the money to repay bondholders, leading to a disorderly default - the outcome markets fear the most and one which may force Athens to abandon the common currency.
This outcome would threaten the highly inter-connected global banking system and many analysts say a wave of contagion larger than that seen in the wake of the 2008 Lehman Brothers collapse could be set in motion.
The resulting flight towards low-risk assets would benefit highly liquid government bonds, such as German Bunds and U.S. Treasuries, pushing yields sharply lower. Some forecast 10-year German yields could sink to 1 percent from their current 1.8 percent.
The euro could extend its recent slide towards $1.20, levels not see since the Greek crisis first peaked in June 2010. Shares in French banks, heavily exposed to Greece, were seen falling.
Holders of CDS contracts would be paid out in the event that Greece failed to repay the bond.
LAST-MINUTE RESCUE
The closer the March 20 deadline, the more likely a potentially disastrous disorderly default becomes.
The threat of this doomsday scenario could persuade international lenders to give Greece the money to repay its March bond.
The International Monetary Fund has requested internal approval to start talks with Greece on "exceptional access" to the Fund.
However, a last-minute rescue would reward speculative investors who bought Greek debt at deep discounts with a full payout - an outcome analysts believe would face strong political resistance.
Under this scenario, financial markets, cautious about the prospect of an unprecedented euro zone sovereign default, would trade in a volatile fashion with sentiment hinging on any signs that a deal was going to be reached.
Safe-haven assets such as German Bunds were likely to be in high demand but susceptible to sharp sell-offs if a rescue was suddenly seen to be in the offing.
yahoo.com
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