Bondholder Group Sees Over $131.8 Trillion Greek Default Risk

By Alex Chambers and | March 6, 2012

A disorderly Greek default would probably leave Italy and Spain needing outside help to stop contagion spreading and cause more than €1 trillion ($1.318 trillion) of damage to the euro zone, the group representing Athens’ bondholders warned.

Greek private creditors have until Thursday night to say whether they will take part in a bond swap that is part of a €130 billion [$171.34 billion] bailout deal to put the country on a more stable footing and cut its debt by more than €100 billion [$131.8 billion].

Finance Minister Evangelos Venizelos told Reuters on Monday the exchange was the best deal bondholders will get and he would activate laws forcing losses on bond holders who did not sign up.

Analysts said the Institute of International Finance Feb. 18 document, marked “IIF Staff Note: Confidential” may have been designed to alarm investors into participating in the exchange.

“There are some very important and damaging ramifications that would result from a disorderly default on Greek government debt,” the IIF said in a document obtained by Reuters.

“It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion.”

If the Greek deal fell apart, the European Central Bank would likely suffer substantial losses, the document said, estimating the central bank’s exposure to Greece of €177 billion [$233.3 billion] was over 200 percent of its capital base.

Both Ireland and Portugal would need more outside help to insulate them from Greece, which could cost €380 billion [$500.8 billion] over five years, the IIF estimated.

A disorderly Greek default would also probably require “substantial support to Spain and Italy to stem contagion there,” which could cost another €350 billion [$461.3 billion], it said.

The IIF, which helped negotiate the bond swap on behalf of creditors, also said there would be more massive bank recapitalization costs, which could easily hit €160 billion [$211 billion].

Investors are under pressure to sign up to the deal, which will see them lose almost three-quarters of the value of their bonds.

Greece wants creditors who hold 90 percent or more of the debt to agree. If take-up falls below that but exceeds 75 percent, it is expected to force losses on those who do not willingly sign up, known as collective action clauses (CACs).

Below that level, the deal could be off, potentially plunging the euro zone back into crisis.

“Obviously the report is written on a worst case basis to try and encourage participation in the exchange,” said Gary Jenkins, analyst at Swordfish Research.

“The most likely outcome may well be that Greece passes its 75 percent target and then uses CAC’s to ensnare the remainder.”

Venizelos has said he would not hesitate to activate the CAC laws.

A dozen major Greek bondholders, all on the IIF’s steering committee that helped draw up the deal, said on Monday they would support the swap. They hold about one-fifth of the €206 billion [$271.5 billion] of bonds in circulation.

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