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Greece may have to renegotiate private sector deal if bailout falls through Greece may have to renegotiate private sector deal if bailout falls through
(40 minutes later)
"Private sector involvement" – with investors such as banks and hedge funds taking a loss on their holdings of Greek bonds – is a key part of the rescue package for Athens that's been painstakingly cobbled together over months."Private sector involvement" – with investors such as banks and hedge funds taking a loss on their holdings of Greek bonds – is a key part of the rescue package for Athens that's been painstakingly cobbled together over months.
But if the €130bn (£108bn) bailout from the troika of the European commission, the ECB and the IMF is delayed – or withdrawn altogether – it's likely that Greece will have to go back to the drawing board and start negotiations with its private sector creditors all over again.But if the €130bn (£108bn) bailout from the troika of the European commission, the ECB and the IMF is delayed – or withdrawn altogether – it's likely that Greece will have to go back to the drawing board and start negotiations with its private sector creditors all over again.
For one thing, the writedown, or "haircut", of up to 70% on Greek bonds that's at the heart of the negotiations is being bought at the expense of up to €30bn in sweeteners, financed by the eurozone bailout fund, the European Financial Stability Facility.For one thing, the writedown, or "haircut", of up to 70% on Greek bonds that's at the heart of the negotiations is being bought at the expense of up to €30bn in sweeteners, financed by the eurozone bailout fund, the European Financial Stability Facility.
Without that cash, the Institute of International Finance, the Washington-based body that is representing the banks in the talks, would be likely to walk away – or at least to offer up a much smaller haircut. Without that cash, the Institute of International Finance, the Washington-based body representing the banks in the talks, would be likely to walk away – or at least to offer up a much smaller haircut.
More importantly, though, if the wider bailout offer is withdrawn, the incentives for investors would change fundamentally.More importantly, though, if the wider bailout offer is withdrawn, the incentives for investors would change fundamentally.
The entire rationale for the fraught negotiations with Greek creditors is based on reaching a voluntary agreement, and thus avoiding a so-called "disorderly" default, which would trigger financial insurance policies such as credit default swaps and send shockwaves through Europe's financial markets.The entire rationale for the fraught negotiations with Greek creditors is based on reaching a voluntary agreement, and thus avoiding a so-called "disorderly" default, which would trigger financial insurance policies such as credit default swaps and send shockwaves through Europe's financial markets.
As Jonathan Loynes of Capital Economics points out, with the writedown now at up to 70%, "the distinction between voluntary or disorderly default has become pretty blurred in all of this".As Jonathan Loynes of Capital Economics points out, with the writedown now at up to 70%, "the distinction between voluntary or disorderly default has become pretty blurred in all of this".
If investors are only receiving 30% of the face value of their bonds, they might start to prefer the idea of getting a payout on their CDSs instead – particularly the hedge funds, who may not be as worried about the second-round effects of a Greek default as large banks sitting on billions of euros-worth of Italian, Portuguese and Spanish debt.If investors are only receiving 30% of the face value of their bonds, they might start to prefer the idea of getting a payout on their CDSs instead – particularly the hedge funds, who may not be as worried about the second-round effects of a Greek default as large banks sitting on billions of euros-worth of Italian, Portuguese and Spanish debt.
But if Athens doesn't receive its bailout, and will therefore have to miss bond repayments – a so-called "hard default" – the whole rationale for preserving the fiction of voluntarism completely falls away.But if Athens doesn't receive its bailout, and will therefore have to miss bond repayments – a so-called "hard default" – the whole rationale for preserving the fiction of voluntarism completely falls away.
Talks on a debt swap would probably restart once the dust settled. Like Argentina, which defaulted a decade ago, Greece would eventually want to regain access to the world's capital markets. It would therefore have an interest in trying to salvage some credibility, by making a deal with its creditors to repay some proportion of what it owes.Talks on a debt swap would probably restart once the dust settled. Like Argentina, which defaulted a decade ago, Greece would eventually want to regain access to the world's capital markets. It would therefore have an interest in trying to salvage some credibility, by making a deal with its creditors to repay some proportion of what it owes.
But unlike the current round of talks, the only interest at stake would be in negotiating a way out for Greek taxpayers – not in fretting about the precedents any deal would set for other embattled debt-burdened eurozone states. And in the short term, as Athens battled with the chaos of default, all bets would be off.But unlike the current round of talks, the only interest at stake would be in negotiating a way out for Greek taxpayers – not in fretting about the precedents any deal would set for other embattled debt-burdened eurozone states. And in the short term, as Athens battled with the chaos of default, all bets would be off.