Greece debt swap down to the wire

@CNNMoneyInvest March 8, 2012: 5:24 PM ET

NEW YORK (CNNMoney) -- Greece is on the cusp of what could be a real make-or-break moment.

The nation's private-sector creditors had until the end of the day Thursday to decide whether or not to accept a proposed restructuring of Greek government bonds.

According to unconfirmed reports in Greek news media, as many as 80% of bondholders have agreed to take part in the restructuring, which Greece needs to qualify for more bailout money and avoid default.

"I look forward to maximum participation of the private sector, which will be instrumental in the effort of adaptation and recovery of our economy," Greek Prime Minister Lucas Papademos told members of his cabinet.

An official announcement is expected to be published around 1 a.m. ET Friday on the government's website for bondholders.

The terms of the restructuring are not attractive for bondholders, although the alternative is not very appealing either.

Investors who own Greek bonds have been "invited" to voluntarily take part in a writedown and debt swap that could result in losses of up to 75%. But rejecting the offer could result in investors incurring even larger losses if Greece defaults.

For Greece, and the eurozone, the stakes are potentially huge.

The agreement on private-sector involvement, as it is known, is the final hurdle Greece must clear to meet all the conditions of its second €130 billion bailout program from the European Union and International Monetary Fund.

Assuming the deal is accepted, European finance officials could approve the final portion of Greece's bailout as early as Friday.

The Institute of International Finance, which represents private-sector creditors, announced Wednesday that a group of more than 30 institutions had agreed to participate. The banks, insurance companies and other investors own an aggregate €84 billion worth of Greek bonds, which amounts to 40.8% of the €206 billion that Greece owes the private sector.

Ideally, Greece needs 90% of bondholders to volunteer for the restructuring in order to close its funding gap. And most analysts expect some bondholders to reject the deal.

To ensure that the participation rate is high enough, the Greek government retroactively inserted collective action clauses into the contracts that govern its domestic bonds. The clauses give Greece the authority to force bondholders who do not volunteer for the restructuring to abide by the terms anyway.

However, Greece needs a sufficiently large number of investors to volunteer for the restructuring in order for it to be considered a collective action.

The unofficial target for the so-called participation rate is 66%. Anything below that threshold might not be considered voluntary, which would make it difficult to argue that the action was collective.

Greece gets a reprieve

On the other hand, if more than 66% of investors volunteer for the restructuring, Greece could use collective action clauses to make the terms binding for all bondholders. That could result in an effective participation rate of 100% of domestically issued Greek bonds and unlock the full amount of Greece's bailout.

The agreement involves investors volunteering to write down 53.3% of the value of the bonds and swap Greek debt for securities with lower interest rates. It would eliminate €107 billion from Greece's debt load and save the nation another €150 billion in refinancing costs over the next few years, according to the IIF. To top of page

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