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The wait is over
The biggest sovereign default in history, and the most anticipated
MOST came quietly in the end. After a tortuous process, the majority of private holders of Greek government bonds had agreed by March 9th to trade in their bonds for new longer-dated ones with less than half the face value of the old ones and a low interest rate. The biggest sovereign-debt restructuring in history allowed Greece to wipe some €100 billion ($130 billion) from its debts of around €350 billion. It will also be the first test of the resilience of the financial system to the payment on sovereign bonds of credit-default swaps (CDSs), a form of insurance against bad debts.
Holders of €152 billion of the €177 billion of sovereign bonds issued under Greek law signed up to the swap. The rest—those who did not respond to the bond-exchange offer or the holders of around €9 billion of bonds who opposed it—were forced to accept the deal. The Greek government invoked a recently enacted law that bound all private bondholders to the bond-swap if more than two-thirds of them consented to it. Around €20 billion of the €29 billion of Greek bonds issued under foreign law also agreed to the swap. The rump were given until March 23rd to come around to the deal.
The threat of coercion might explain why big holders like banks and pension funds chose not to contest the terms of the swap. But Greece needed to achieve close to 100% participation in the bond-swap to unlock its second bail-out package from international lenders. That meant it had to force the small group of malcontents to swallow the deal, which in turn meant it could no longer be seen as voluntary. That triggered a “credit event†and started a process that will lead to a payout of CDS insurance on Greek bonds later this month.
Financial markets took the news with a shrug, even though for months European officials have looked with horror at the prospect of a sovereign-credit event in the euro zone. Their angst stemmed partly from earlier official pledges that Greece would not default or restructure its debts: a “voluntary†loss-taking by private investors would have allowed that fiction to be upheld. Euro-zone policymakers may also have been anxious not to trigger payouts to amoral “speculators†who had bet against a country going bust.
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The biggest sovereign default in history, and the most anticipated
MOST came quietly in the end. After a tortuous process, the majority of private holders of Greek government bonds had agreed by March 9th to trade in their bonds for new longer-dated ones with less than half the face value of the old ones and a low interest rate. The biggest sovereign-debt restructuring in history allowed Greece to wipe some €100 billion ($130 billion) from its debts of around €350 billion. It will also be the first test of the resilience of the financial system to the payment on sovereign bonds of credit-default swaps (CDSs), a form of insurance against bad debts.
Holders of €152 billion of the €177 billion of sovereign bonds issued under Greek law signed up to the swap. The rest—those who did not respond to the bond-exchange offer or the holders of around €9 billion of bonds who opposed it—were forced to accept the deal. The Greek government invoked a recently enacted law that bound all private bondholders to the bond-swap if more than two-thirds of them consented to it. Around €20 billion of the €29 billion of Greek bonds issued under foreign law also agreed to the swap. The rump were given until March 23rd to come around to the deal.
The threat of coercion might explain why big holders like banks and pension funds chose not to contest the terms of the swap. But Greece needed to achieve close to 100% participation in the bond-swap to unlock its second bail-out package from international lenders. That meant it had to force the small group of malcontents to swallow the deal, which in turn meant it could no longer be seen as voluntary. That triggered a “credit event†and started a process that will lead to a payout of CDS insurance on Greek bonds later this month.
Financial markets took the news with a shrug, even though for months European officials have looked with horror at the prospect of a sovereign-credit event in the euro zone. Their angst stemmed partly from earlier official pledges that Greece would not default or restructure its debts: a “voluntary†loss-taking by private investors would have allowed that fiction to be upheld. Euro-zone policymakers may also have been anxious not to trigger payouts to amoral “speculators†who had bet against a country going bust.
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