Demands may trigger Greek default
LONDON - Finland’s demands for collateral on loans to Greece may trigger a default on $26 billion of bonds sold by Europe’s most-indebted country.
The securities, which represent less than 7 percent of Greece’s $412 billion of bonds, are governed by English, not Greek, law, and include conditions that insist on equal treatment for all investors. Giving collateral to Finland as a condition for aid may breach the requirement that fresh debt does not win repayment priority over existing notes.
“I am pretty sure the Greek government didn’t even know this, their incompetence is legendary,’’ said Andreas Koutras, an analyst at InTouch Capital Markets, a London-based fixed-income adviser. “One should be very careful when giving securities or other collateral, like the Greek government is with the Finns.’’
Finland said this week it is open to renegotiating its Aug. 16 agreement to take collateral in exchange for contributing to Greece’s second bailout, after a backlash prompted similar demands from countries including Austria and the Netherlands. Greece’s 10-year yield climbed to a euro-era record of 18.47 percent today, driving the yield gap to German bunds to 16.22 percentage points, also a record.
Tim Haywood, a London-based fund manager, owns the Greek bonds issued under English law. According to terms of the floating-rate notes due May 2012, he is ranked equally with Finland and other creditors that are claiming priority.
“It is my fervent hope we will be fully repaid,’’ Haywood said. “If not, I expect no one else to be.’’
Greece received a three-year, $158.4 billion rescue in 2010 from the European Union and International Monetary Fund. The nation sought another bailout this year as its economic woes stymied plans to return to the capital markets in 2012, and private investors were asked to participate.
The plan, drawn up by the Institute of International Finance, the bankers’ lobby group, offers bondholders four options to exchange their sovereign debt at a discount for fully or partially collateralized notes.
Providing collateral to lenders seeking agreement on terms for $229 billion of additional aid risks making the new loans senior to the existing international bonds.
The Finnish government said earlier this month it reached an accord on collateral to ensure its contribution to the bailout is repaid.
By giving in to demands for collateral, Greece risks triggering the so-called negative pledges in the documentation of the international bonds, said InTouch’s Koutras. The notes were issued in dollars, Swiss francs, Japanese yen, as well as in euros.
“So long as any note remains outstanding, the Republic shall not create or permit to subsist any mortgage, pledge, lien, or charge upon any of its present or future revenues, properties or assets to secure any external indebtedness,’’ according to the prospectus for Greece’s 2012 bond. The wording is repeated in the documentation of other international bonds.
Failure to respect “any covenant, condition, or provision set out in the notes’’ is an event of default, according to the prospectuses.
A default would allow bondholders to demand immediate repayment of principal and accrued interest, and trigger cross-default clauses on other international borrowings.