Greece Debt Swap Surprises, Great Deal for the Country

The FT is reporting,

The largest debt restructuring in history was heading for a successful outcome last night as Greece looked set to see a participation rate of close to 95 per cent for its €206bn bond exchange.

One person involved in the deal said that more than 90 per cent and possibly more than 95 per cent of investors had taken part, assuming collective action clauses (CACs) were used to bind dissenting holders of some bonds.

We are not sure if the totals include/exclude bonds held by the ECB and EIB.

We do find it interesting, however, to hear some analysts state “Greece is still going to default.”   On what, may we ask?

Setting the official debt aside — EU,  IMF, etc — which doesn’t trade and not subject to market rates, let’s take a look at the new bond debt service burden.

The bond exchange allows Greece to effectively buyback and thus retire €141.11  billion or 68.5 percent of its €206 billion bond stock, at 22 cents on the euro.   The remaining 31.5 percent of bonds , or  €64.89 billion,  are exchanged for various bonds with 11-30 year maturities and an annual coupon of 2 percent through 2015 and gradually stepping up thereafter.

Thus, assuming full participation,  Greece will now have annual bond payments of only €1.3 billion through 2015 and €1.9 billion from 2016 to 2020.   That’s only 0.5 to 0.8 percent of 2011 GDP, which makes default on the new bonds very unlikely, in our opinion.  Unless, of course,  a meteorite hits the country.

We’ve worked on many of the world’s largest sovereign restructurings and this is in one helluva of deal for Greece,  in our opinion.   Now let’s hope the government can continue on the reform path and animal spirits can generate some investor confidence, which will allow the economy to bottom and start to recover.

At the very least,  assuming this deal closes,  the  “acute”  part of Greece’s sovereign debt crisis where large bond maturities could not be repaid and almost took down Europe and its banking system in the second half of 2011 is over.   The country still needs a big adjustment in relative prices,  but they have bought some time,  politics willing.

Hats off to those getting this deal done!

Godspeed, Greece.

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