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Greece debt swap plan hangs in balance

Athens, September 10, 2011

A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance with expectations of take-up by private creditors slipping amid fierce European pressure on Athens.

Banks and insurers were due to indicate whether they intend to join the bond exchange, part of a planned second international bailout package agreed in July which is in doubt due to Greece's failure to meet its fiscal targets.

Officials said on Friday they expect a take-up rate of about 70 per cent, well short of the original 90pc target, which would see 135 billion euros ($189 billion) of Greek bonds maturing by 2020 swapped or rolled over in a global transaction.

Greece had threatened to cancel the deal unless it got 90pc participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance.

No official announcement of the take-up rate was expected yesterday, but a source close to the scheme said a bigger response rate was likely "as bond holders rush on the last day".

Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.

The euro and Greek bank shares fell and the cost of insuring Greek debt against default soared above 3,000 basis points on the deadline day. The market moves reflected investor worries about the debt swap but also over an impasse in Athens' negotiations with the European Union and the International Monetary Fund, and the wider impact of the euro zone debt crisis for banks' solvency.

IMF managing director Christine Lagarde renewed her call to European countries to take urgent action to recapitalise banks at risk from their sovereign debt exposure.

Speaking hours before she attends a meeting of Group of Seven finance ministers and central bankers in Marseille, France, Lagarde said: "In view of the heightened risks and uncertainties - and the need to convince markets - some banks need additional capital.

"We must not underestimate the risks of a further spread of economic weakness, or even a debilitating liquidity crisis. That is why action is needed so urgently so that banks can return to the business of financing economic activity," she said.-Reuters




Tags: Greece | Default | balance | debt swap | hangs |

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