Greece, markets upbeat on bond swap deal

ELENA BECATOROS NICHOLAS PAPHITIS Associated Press Published:

ATHENS, Greece (AP) -- Greece government officials and world markets appeared confident that a high number of private investors would participate in a major Greek debt reduction deal as the deadline to do so passed Thursday night.

Participation in the landmark agreement ended as planned at 10 p.m. (2000 GMT; 3 p.m. EST) Thursday.

It is aimed at slashing the country's national debt by €107 billion ($140 billion), with private bond holders accepting a face-value loss of 53.5 percent, in exchange for new bonds with more favorable repayment terms.

Initial results of participation in the exchange are due to be announced early Friday.

The swap is a critical part of the country's second international bailout. If too few investors agree and it fails, the crisis-hit country will likely default on its debt in less than two weeks when a big bond repayment is due, prompting renewed turmoil in financial markets and knocking confidence in the global economy.

A government official said Thursday evening that as of Wednesday night, the takeup on the offer had already topped 75 percent. He spoke on condition of anonymity pending official government announcements.

Major Greek and European banks have signed up to the deal, though several Greek pension funds, including ones representing journalists and police embarrassed the government by holding out.

Charles Dallara, head of the Institute of International Finance, or IIF, which has been negotiating on behalf of large private creditors in the deal, said he believed the participation would likely be "very, very high" and that he was "quite optimistic" the deal would come together.

Athens has said it needs 90 percent participation for the deal to be successful. However, it can trigger legislation forcing holdouts to go along if creditors holding between 75 percent and 90 percent sign up.

Markets have been optimistic that Greece will muster enough support. The Athens stock exchange closed up 3.1 percent, while the Stoxx 50 of leading European shares rose 2.17 percent. The euro was trading 0.8 percent higher at $1.3240.

The bond swap is a radical attempt to pull Greece out of its debt spiral and put its shrinking economy back on the path to recovery. The hope is that by slashing the overall debt, the country, which is in a fifth year of recession, can gradually return to growth and eventually repay the remaining money it owes.

The task at hand, even with the debt reduction, is massive. Official figures released Thursday showed unemployment shot up to a record 21 percent in December, compared with 14.8 percent last year. It's even worse for young people with 51.1 percent of those aged between 15 and 24 out of work.

"Obviously for the majority of bondholders it does make sense to accept the deal as it is better to get something rather than nothing and if the exchange failed and Greece undertook a disorderly default then the likelihood is that nothing is close to what bondholders would recover," said Gary Jenkins, managing director of Swordfish Research. "Thus the most likely outcome remains that Greece will receive enough acceptances to move ahead with the deal and trigger the second bailout package."

By early Thursday, banks, pension funds and other investors holding well over half the €206 billion ($270 billion) total debt in public hands had pledged to take part. New legislation will allow Greece to force holdouts into accepting the deal if overall participation is not high enough.

Italy's Premier Mario Monti was upbeat. "The resolution of the Greek financial crisis is in sight," he said earlier Thursday afternoon.

Only bonds held by private investors are part of the deal, meaning outstanding amounts held by the European Central Bank and other central banks are exempt. Athens will announce the results early Friday, after which finance ministers of European countries using the euro are to discuss the outcome in a conference call.

Greek Prime Minister Lucas Papademos held a Cabinet meeting Thursday afternoon on the deal. Finance Minister Evangelos Venizelos informed the ministers that the process had been "going well," an official in the meeting said. He, too, spoke on condition of anonymity because no official announcements had been made.

The complex bond swap, known as the Private Sector Involvement, or PSI, is critical for Greece to secure its second bailout -- a €130 billion ($171 billion) package of rescue loans from other eurozone countries and the International Monetary Fund.

The IIF said 32 firms holding €84 billion ($111 billion) of Greek bonds have signed up, including major German, French, Greek and Cypriot banks. German reinsurer Munich Re, which holds some €1.6 billion ($2.1 billion) in Greek bonds, also will participate.

Another €17.5 billion ($23 billion) in bonds owned by Greek social security funds but managed by the central bank will also be part of the swap. Eight Greek social security or pension funds holding €3.2 billion ($4.2 billion) in bonds have signed up to the deal, while another six, who hold €3.4 billion ($4.5 billion), have voted against. The holdouts include funds for journalists, police, lawyers, doctors and civil engineers.

Some other creditors, notably hedge funds, are also expected to hold out, with some expecting to profit from payouts of so-called credit default swaps.

CDS are complex financial products, in which the CDS seller pays the CDS holder in case of default of some underlying assets, such as a government bond. Initially created as a type of bond insurance, CDS have also been used by speculators who do not own the underlying asset but hope to profit from a default nevertheless.

Eurozone leaders and the European Central Bank wanted the Greek bond swap to be entirely voluntary to avoid a CDS payout, which they fear could create a cascade of losses in an already shaky financial system.

However, the International Securities and Derivatives Association, the organization overseeing CDS, says the actual payouts on CDS's linked to Greek bonds will be less than $3.2 billion.

The president of the German Banking Association, Andreas Schmitz, said he doesn't expect the bond swap -- even if it results in a CDS payout -- to cause turmoil.

"The consequences won't hit the market as hard as many thought even a short while ago," Schmitz said Thursday. "I think that the market today will react quite rationally."

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Gabriele Steinhauser in Brussels, Demetris Nellas and Derek Gatopoulos in Athens, and Jovana Gec in Belgrade contributed.