Moment of truth on Greek debt deal approaches

Banks, insurers and investment funds holding Greek debt must decide by Thursday whether to cancel half of the money they are owed, a key component of an EU/IMF plan to keep Greece from defaulting. Investors have until 2000 GMT Thursday to join an unprecedented debt swap worth up to 107 billion euros ($140 billion) known as private sector involvement or PSI, which was agreed in February after months of tough negotiations. "I'm confident that the PSI deal will be successfully concluded," EU Economic Affairs Commission Olli Rehn said Tuesday during a visit to Paris. Under the terms of the deal, holders of Greek debt are asked to exchange a total of 206 billion euros in bonds for new debt with a 30-year maturity, EU-backed notes and securities linked to Greece's future output. The restructuring of Greece's 350-billion-euro debt pile is also based on 130 billion euros in loans from the European Union (EU) and International Monetary Fund (IMF). But Greece has warned that 75 percent of eligible investors must take part in the debt swap or the exercise would be called off, just two weeks ahead of a 14.4-billion-euro debt reimbursement that Athens cannot afford. If the PSI rate reaches 75 percent, Greece will introduce collective action clauses to force the hands of the remaining investors. The writedown is the greatest ever attempted, and dwarfs an $82-billion Argentinian default in 2002 (the equivalent of 74 billion euros at the time). The level of private sector involvement in Greece has risen from a writeoff of 50 percent envisaged six months ago to 53.5 percent, but it could end up costing 70 percent on particpants' balance sheets. Greek debt holders are to receive new bonds with a face value equal to 31.5 percent of the amount of the debt exchanged, plus 24-month notes from the European Financial Stability Facility, the eurozone's current rescue fund. The complete programme is intended to reduce the ratio of Greek debt to output from more than 160 percent of gross domestic product to 120.5 percent in 2020, which is considered the maximum sustainable debt level over the long term. Loans from the EU and IMF include 30 billion euros in guarantees to encourage private Greek banks to participate in the debt exchange. A report by the global banking organization that led the writedown talks says the dangers of a disorderly default by Greece are huge. The Institute of International Finance said a default could force expensive rescues for Spain and Italy and cost the eurozone one trillion euros. A default would be particularly damaging to the European Central Bank, the IIF said in a report that was first published last week in Athens News. The IIF estimates the central bank's holding of Greek debt at 177 billion euros or "over 200 percent of the ECB's capital base". The institution warned that beyond Spain and Italy, bailed-out eurozone members Portugal and Ireland would be hit hard by a Greek default as well. Moreover, the IIF warned that "it is difficult to conceive that Greece can remain a functioning member of the Euro Area in the event of a disorderly default." "The practical difficulties, costs ... and implications of such a rushed decision would be substantial," the institute added. A Greek exit from the eurozone "would be a lengthy and messy process, during which financial markets will be driven by panic capital flights spreading contagion to the rest of Europe and the global economy," it said. On Monday the IIF announced that many major holders of Greek debt had accepted the crucial debt rollover plan. Members of the IIF steering committee that accepted the debt swap include Axa, BNP Paribas, Commerzbank, Deutsche Bank and Greece's leading financial institutions.