Just days after European policymakers toasted a 109 billion euro ($156 billion) bailout aimed at hauling Greece back from the brink of insolvency, speculation some of its hapless bondholders might opt out of a crucial distressed debt exchange is gathering pace.
Greek creditors in banking, insurance and fund management are baying for more clarity on a proposed 'voluntary' scheme in which debt can be swapped for 15-year or 30-year bonds paying interest Greece can more easily afford, and slashing its debt.
Bank lobby group the Institute of International Finance reckons 90 percent of Greek government bondholders will take a 21 percent haircut on their holdings to take part in the offer.
But some investors are debating the value of boycotting, particularly as heavily exposed lenders and insurers rush to endorse the plan in moves that may improve non-participating smaller bondholders' chances of being paid on time and in full.
"If you do a selective default — allowing investors across the board to opt in but you only actually get a few holders carrying 40 or 50 percent of the total exposure to do it — that ... means you can afford to pay out more of the smaller holders," Colin Harte, a director of fixed income and currency at Baring Asset Management, told Reuters.
Deutsche Bank, HSBC, BNP Paribas, Societe Generale, Allianz, AXA and Generali hastily signed up to the scheme on Friday but a slew of others including Royal Bank of Scotland have yet to confirm their participation.
"We doubt the banks and insurers which have declared their intention to participate have done so because the options at hand offer attractive economic value to them," said Georg Grodzki, head of credit research at Legal & General Investment Management"...There is material risk that continued failure by Greece to deliver on the agreed (deficit reduction) targets will force the EU/IMF to demand further sacrifices from private investors to reduce the burden for European taxpayers." Besides fears of further haircuts to come, some less risk-averse bondholders with shorter investment horizons have recognised potentially lucrative secondary market trading opportunities while they wait for more details to emerge.
Yields on 10-year Greek government bonds have tightened more than 250 bps to around 15 percent since Wednesday when details of the second bailout leaked, handing sizable gains to 'vulture' investors who managed to sell on debt bought earlier at higher yields.
Investors can choose a bond exchange at par into a 30-year instrument, a bond offer at par involving rolling over debt at maturity into 30-year bonds, a discounted swap at 80 percent of par into a 30-year bond and a discounted swap at 80 percent of par into a 15-year bond.
The interest on the first two instruments is equivalent to a fixed rate of 4.5 percent, on the third 6.42 percent and 5.9 percent on the fourth.
Steven Mitra, partner and fund manager at hedge fund firm LNG Capital, said he had reservations about the offer and he suspected many other investors did too.
"On the short-dated it doesn't make sense, given your option is to change short-dated paper to the 30-year or get paid out at par.
You'd just take par and go home in an ideal world but something somewhere tells me that's not going to be the case," he said.
Darren Williams, European economist at AllianceBernstein, estimates the net contribution from private Greek bondholders by mid-2014 will amount to 50 billion euros, comprising 37 billion from rollovers and 13 billion from buybacks.
Williams sees this contribution rising to 106 billion euros by 2019, depending on participation rates achieved, but the involvement is likely only to soothe, rather than remedy Greece's debt problems, he said.
Ratings agency Moody's Investor Services said the package set a negative precedent for creditors of other debt-burdened countries after cutting Greece's sovereign debt to one notch above default.
Like rival Fitch Ratings, Moody's said it would offer a new rating after the debt swap completes.
David Tan, global head of rates for fixed-income at JP Morgan Asset Management, said the extent of private sector involvement in the scheme wouldn't be known until the exchanges took place, but others already doubt its capacity to shore up Greece's finances.
"The European crisis is best seen as the middle of a complicated chess match, where the endgame is necessarily very uncertain," Standard Life Investments head of global strategy Andrew Milligan told Reuters.
"Governments have impressed investors in the short term with a range of options and some useful tools but ...
ultimately a country's nominal GDP must grow above its cost of capital; 3.5 percent interest rates are still too onerous for some countries such as Greece," he said.