Greece Plays Chicken With Bondholders...Again

Macduff Everton | Ironica | Getty Images

Remember when everyone worried that Greece would default on its bonds?

Now the concern is that Greece might not default on certain bonds held by investors who did not participate in the swap deal last month.

Greece's finance ministry on Wednesday again extended the deadline for holders of Greek bonds issued under foreign law to agree to swap them with new securities, which are worth something like 25 percent of their original value. It’s still not clear what will happen if the bondholders continue to refuse to swap their bonds.

Greece could default on the bonds, refusing to pay anything at all. Indeed, that is what Greece has long been promising to do.

"The Hellenic Republic emphasized that it has, from the outset, advised its creditors that its economic programme does not contemplate the availability of funds to make payments to private creditors that decline to participate," the finance ministry said last month.

It’s easy to see why Greece takes this position. It wants to encourage bondholders to swap. If bondholders believe they’ll get a better deal by holding out, they’ll likely do so. Promising not to pay holdouts incentivizes bondholders to swap.

But Greece seems to have a credibility problem. The bonds, which were issued under foreign law and thus not subject to the mandatory swap made possible by an act of the Greek legislature, are trading at around 70 percent of their par value—500 basis points better than the value of the bonds received in the swap. That implies that investors think they’ll get a better deal by holding out.

Reuters reports:

A majority of investors have already rejected the debt swap for the May 15 bond [the next date a Greek bond matures], a finance ministry official said. But they cannot derail the overall debt swap plan - the biggest debt restructuring in history - which has now been accepted by about 97 percent of investors.

A source familiar with the talks said that the majority of the bonds maturing in May are in the hands of activist shareholder Elliott Advisors, which is well-known for contesting previous sovereign debt restructurings in Latin America. Elliott declined to comment.

Greece has said it cannot afford to fully pay holdouts and that the swap deal that domestic-law bound bondholders were forced to accept last month is the best available offer.

Why might investors think they’ll get a better value by holding out? Most of the foreign law bonds were issued under English law. Bondholders may figure that if the final tally of holdouts is small enough, Greece would simply decide to pay them in full, rather than face lawsuits in U.K. courts.

This, however, would be controversial both in Greece and across Europe. The Greek public, which has seen some of its pension funds accept losses on the Greek law debt, would likely be outraged by the idea of Greek bondholders getting paid off at par. And countries like Spain and Portugal might find it harder to convince their own bondholders to voluntarily engage in similar debt swaps if the Greek holdouts appear to have won.

The deadline has been moved back to April 20. But the only hard deadline is May 15, when Greece is due to make a 450 million euro payment on a foreign law bond. By then, we’ll know whether the holdouts or Greece blinks first. Or if neither do — and Greece defaults.

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