Athens Issues Threat to Bond Holdouts

Greece has threatened to default on any of its bondholders who do not take part in a 206 billion euros debt restructuring that officials believe is key to returning Athens to solvency, a move that turns up the heat on potential holdouts ahead of a deadline on Thursday.

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The Greek public debt management agency said in a statement Athens “does not contemplate the availability of funds” to pay private investors who hold on to their bonds once the restructuring occurs. The transaction is projected to wipe 100 billion euros from Greece’s debt pile, but 95 percent of bondholders must participate for that target to be reached.

“There is no commitment not to pay, but there is a threat,” said Charles Blitzer, a former senior IMF official. “If you don’t maximise participation, you’re asking for more stress in the programme or more [bailout] money from the official sector.”

The threat is particularly aimed at 14 percent of investors who own Greek bonds issued under international law. The remaining 86 percent, who own 177 billion euros in Greek-law bonds, were also warned that Athens would use new legal provisions, called collective action clauses, to force the deal on holdouts. That would almost certainly trigger credit defaultswaps, a form of insurance that could prove more lucrative for some holdouts but could lead to renewed market uncertainty.

A Greek debt restructuring would mark the first time in more than 60 years an advanced economy has defaulted on its obligations and would be a new nadir in the two-year long euro zone crisis.

People close to the restructuring, which will occur when investors trade in their current bond holdings for new debt with about half the face value, described the statement as aggressive. “It’s a tactical move intended to ratchet up the pressure on bondholders who may be wavering,” one said. “The idea is that the higher the overall participation rate, the weaker the case will be for future litigation by holdouts.”

Many of the potential holdouts in the international law bonds are hedge funds who bought on the hope of being paid back in full while investors with Greek-law securities would accept long-term losses of about 75 percent.

“They will be portrayed as evil hedge funds and nobody will have any pity for them. They need to realise that they don’t have a free option here,” another person close to the deal said.

The offer closes Thursday and the CACs could be triggered on Friday; the new bonds investors will get in the swap are due to start trading on Monday.

European and US shares suffered their worst day of the year on the news, although one market that was up was Athens where equities rose by more than 4 percent. Italian and Spanish benchmark bond yields both moved above 5 percent again.