Greece Faces Big Debt Payment Tuesday: Now What?

As if the Greek situation wasn’t messy enough, a missing paragraph from a key legal document is throwing a wrench into a debt deadline.

The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.
The Parthenon, illuminated at night, sits at the top of Acropolis hill in Athens, Greece, on Monday, Feb. 13, 2012.

Greece has a 436 million euro principal repayment due Tuesday. So far, the country has not decided what to do.

Under normal Greek-debt contracts, if Greece doesn’t pay, it would have only a seven-day grace period. But experts who have pored over all of this have found that one of the key paragraphs from the normally boilerplate language is missing.

As a result, Greece will have a 30-day grace period, leading to the possibility of an extended, “Will they?” or “won’t they?” drama.

Here’s what happened. In debt contracts there is a section titled: Events of Default. In a typical Greek bond it says “If the Republic defaults in the payment of principal…and such default is not cured by payment within 7 days from the due date for such payment.” However, that paragraph is missing from tomorrow’s debt payment.

Instead, if Greece chooses not to pay, it will likely fall under a different paragraph: “the Republic is in default in the performance of any other covenant, condition or provision set out in the Notes and continues in default for 30 days after written notice thereof.” If Greece doesn’t pay, it will mean the country officially enters into default.

You may be saying to yourself: “Wait, I thought Greece already defaulted.”

Earlier this year, private-sector bondholders accepted a huge loss on their bonds, and accepted new bonds, with much longer repayment terms and very low interest rates, as part of a debt restructuring designed to help ease Greece’s fiscal woes.

That debt exchange was billed as “voluntary” because 97 percent of bondholders tendered their bonds. (Let’s put aside the offer was designed to make it nearly impossible to not tender.) Because it was a “voluntary” deal, it was not officially a default.

But then there’s that 3 percent—or roughly 6.5 billion euros worth of hold-outs—that did not tender. Of that, 436 million euros is due Tuesday. To pay or not to pay is really the question.

And at this late hour, there appears to be no decision from Greece on whether those holders will get their money. There is huge internal division about what to do, particularly because Greece is without a government.

Advisors have told Greece not to pay it because they should not reward the hold-outs, especially after Greece made threats to the hold outs during the exchange, saying there would be no money for them.

Additionally, it’s likely a lot of that debt is held by hedge funds that paid only pennies on the euro. If they get paid in full, it could double their investment.

But European leaders are concerned about an official “default.” Not for any economic reason, but for the embarrassment of having a euro zone country (in theory a developed economy) not pay its debts.

At the same time, within Greece, there is debate as to whether such a key decision should be made when there is no government to speak of, due to the lack of a clear outcome from the elections earlier this month.

And now, because of a legal oversight, we may not know the answer for 30 days.