ECB still obstacle to Greek deal

Greece will still have to find about EUR4.6bn by the end of March to repay the European Central Bank, even if next week's EUR206bn bond exchange goes ahead without a hitch.

The swap, which Greece has said will only definitely happen if it is accepted by 90% of eligible bondholders by value, has been timetabled so that the bulk of it settles before a EUR14.4bn bond comes due for repayment on March 20.

The deadline for accepting the offer is 9pm CET this Thursday. The result is likely to be released on Friday and the exchange of the Greek law bonds, accounting for EUR177bn, will settle on Monday March 12. Foreign law issues require bondholder meetings to approve the swap. These will be held later in March with final settlement by April 11.

However, last month in a separate deal the ECB agreed to swap its holdings of Greek bonds bought through the securities market programme for new bonds not eligible for the bond swap. All terms and conditions of the new bonds remained the same. On Friday, the ECB confirmed to IFR that this was the case but declined to go into further details of the transaction.

Together with its national central banks, the ECB was estimated to hold Greek bonds with a par value of EUR55bn. The offer documents for the private sector exchange reveal that most of these bonds had relatively short maturities.

For example, only EUR9.77bn of the bond maturing on March 20 is now outstanding of the original EUR14.4bn issue. The remaining EUR4.63bn was presumably held by the ECB and retired by Greece after the ECB swapped it for new bonds, ineligible for the swap but still maturing on March 20.

To raise that sum Greece might have to issue short-term treasury bills, many of which are also excluded from the swap.

This Thursday, a EUR1.45bn six-month bill matures and on March 23 a EUR1.6bn three-month issue must be repaid. If Greece attempts to roll these over, and meet its obligations to the ECB, it will have EUR7.63bn to issue through this route this month.

The problem has been exacerbated after the Eurogroup of finance ministers said last week that only EUR63bn of the EUR130bn second bailout initially would be released: enough just to implement the private sector bond swap. The money to repay the ECB could come from a EUR35bn eurosystem liquidity facility to allow Greek banks to keep functioning despite their Greek bonds being excluded as collateral for lending during the exchange period.

This money could be loaned on by the domestic banks to the Greek government to meet its obligations. Alternatively, the ECB may relent and agree to extend the maturity of its new bonds. The ECB declined to comment on that point. The ECB also holds EUR3.39bn, or 42%, of the EUR8.06bn 10-year bond that matures on May 18 and EUR3.25bn, or 41%, of the EUR7.85bn five-year bond maturing on August 20.

So far, few institutions are understood to have committed to the offer since it was launched at the start of last week. One source close to the situation said there had been some trading of the bonds, with certain hedge funds reportedly keen to buy bonds in order to tender them, rather than with a view to hold out.

Another informed source said that smaller foreign law bond issues were likely to be targeted. «It is absolutely possible for foreign law bonds to hold out,» the source said.

While Greece could impose the deal with as little as a third of the Greek law bonds, or EUR60bn, voting in favour of imposing the terms on other bondholders, it is thought that the take-up will be above 75% but might not quite hit the 90% level at which the deal will definitely go ahead.

If that is the case, Greece will consult official sector creditors before deciding to implement collective action clauses to impose the terms, giving a 53.5% nominal haircut, on all bondholders. «The case for sweeping up is highly compelling,» said the first source. Chiara Cremonesi, an analyst at UniCredit, pointed out that some investors might vote to impose CACs without tendering the bonds. «Holders of CDS have the incentive to consent to the CACs without tendering their bonds,» she said.

The private creditors' investment committee, which agreed the deal, is believed to represent investors with about EUR100bn of bonds, indicating that the deal will proceed. Depressing Investors will receive two-year bonds issued by the EFSF, which will account for 15% of the old par value. US holders will get cash instead. The remaining 31.5% consists of a series of 20 new Greek bonds that will mature over 20 years from 2023. As well as coupons with an average weighted coupon of 3.65%, investors will also be offered strips of securities linked to Greece's GDP growth that could enhance yields by one percentage point.

However, one sovereign restructuring adviser said that the situation remained unattractive for bondholders since Greece would remain in such a tough economic position with a heavy debt burden even after the deal cuts out EUR100bn of liabilities.

"Normally, people tender into an improving situation because they see the debt burden will be reduced and the economy will recover,» he said. «But with Greece it's very depressing. People tendering here have no option. And I can't see a significant upside soon.» [Reuters] - 

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