Greek bonds price more losses for holders after swap
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Greek debt swap deal this month imposes 21 pct loss on holdings
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Markets price in 60 pct loss, meaning more restructuring feared
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Disorderly default still possible as Greece seeks to meet goals
By Marius Zaharia
LONDON, Sept 6 (Reuters) - Greek
bonds are pricing in losses of about 60 percent for current holders -- three times the haircut envisaged in a planned debt swap, reflecting expectations of further restructuring to come.
Greece's formal proposal to swap bonds with maturity of up to 10 years for 30- or 15-year bonds with additional guarantees is designed to impose a 21 percent loss on debtholders in an attempt to share the burden of the country's second bailout.
The aim is to buy Athens time for reforms intended to reduce its debt -- seen at 1.6 times this year's output -- to more sustainable levels and allow it to regain debt market access.
Investors doubt time alone will be enough.
The level of haircut implied by the June 2020 bond -- which is trading at 45 cents in the euro -- has risen to 65 percent from 50 percent when talk of private sector involvement in the Greek bailout first emerged four or five months ago, ING rate strategist Alessandro Giansanti said.
"The (65 percent level) tells you that the market sees that Greece's debt should fall towards 60 percent of the GDP (gross domestic product), and that is the level at which it would allow Greece to come back to the market," Giansanti said.
The debt reduction could be achieved through another swap, coupled with running primary fiscal surpluses in the most positive scenario, or a unilateral, disorderly default in the worst -- but not improbable -- case.
Greece said last week it would not go ahead with the debt swap if holders of fewer than 90 percent of the bonds participate and signs so far are that only 60-70 percent are willing to take part. Banks have until Friday to signal their intentions.
Whatever the banks decide, fiscal slippage and negotiations with Finland over its demand for collateral to back up its contribution could still prevent the second bailout deal from going through.
The Greek/German 10-year yield spread has widened by more that 5 full points to record wides of 1,775 bps from lows reached on July 22 after a one-day Greek debt rally in reaction to agreement on the second aid deal.
"There is a risk that the next tranche won't be available in which case they don't have that much time until they would default," said Evolution Securities strategist Elisabeth Afseth, who also estimates haircuts of around 60 percent are priced in by bond
markets.
At around 2,600 bps, five-year credit default swap prices reflect an 88 percent probability of default based on a 38 percent recovery rate, Reuters calculations based on Markit CDS data show.
The Greek yield curve peaks at levels above 50 percent for two-year bonds, implying markets see a high probability of default in the next two years.
The debt swap, if it goes as planned, could lift the prices of some bonds and lower the implied haircut to reflect Greece's improved financing position due to the maturity extension. But any gains may be temporary.
"These valuations are still highly dependant on the next aid tranche and it's always going to be like that," Afseth said. "It is very unlikely that this is the last we hear about restructuring of Greek debt." (Editing by
Nigel Stephenson)
