Greece faces new taboo: not defaulting

April 5, 2012

By Neil Unmack

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Greece’s debt restructuring has been a total success – almost. A small number of bondholders have rejected the debt swap. The holdouts could drag Athens through international courts. But paying them off would be difficult too.

Greece has so far forced investors holding 177 billion euros of bonds issued under domestic law into accepting a restructuring, as well as some foreign-law bonds. All in all, it has roped in about 96 percent of the private sector bonds targeted in the swap, enough to secure a second bailout from euro zone partners and the International Monetary Fund.

But some holders of bonds issued under foreign law, and by state-owned enterprises, aren’t playing ball. These bonds have similar collective action clauses (CACs) to the Greek-law bonds that Athens used to force losses on creditors. But because the CACs must be activated for each of the 36 different bonds, it is easier for investors to resist. So far, investors in 11 of the bonds have rejected the restructuring, and votes for another nine have been adjourned. Greece has already said it cannot pay holdouts more than they would get under the swap. If they don’t agree, a default will follow.

The threat to Greece is that bondholders then pursue their claim in the English courts, undermining the country’s revival. Argentina is still locked out of markets despite restructuring its debt years ago. The matter will come to a head in May, when a 450 million euro bond matures. The bonds are currently trading at about 70 percent of par, suggesting investors believe they will get a much better deal than the debt swap, which imposed losses of 75 percent. However, Greece has already crossed the default rubicon by forcing losses on bondholders and triggering credit default swaps linked to its debt. Paying the bonds would anger Greek voters, euro zone governments, and creditors who have already been strong-armed into the swap.

Perversely, the choice becomes tougher as more bondholders fall into line. If it is left with just a very small number of holdouts, it might be easier for Greece to offer a better deal, or even repay bonds at par. But for now, it can play hardball.

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