Greece’s government formally asked investors to exchange their holdings of government debt for new securities in the biggest sovereign restructuring in history.
“The Ministerial Council of the Hellenic Republic today approved the terms of invitations to be made to private sector holders,” the Greek Ministry of Finance said in a statement on Friday on a Web site set up for the exchange.
The bonds subject to the invitation had a total face value of about 206 billion euros (US$277 billion).
The government seeks a 90 percent participation rate and set a 75 percent rate as a threshold for proceeding with the transaction, according to the statement.
Parliament approved laws on Thursday to permit the exchange and cut 106 billion euros of the country’s debt. Private creditors gave their backing earlier this week as eurozone finance ministers weighed a 130 billion-euro package for the nation, its second rescue.
Institute of International Finance managing director Charles Dallara, who represented private bondholders in debt-writedown talks with the government, said he expected a majority of investors to agree to a voluntary bond swap.
“I’m quite optimistic,” Dallara told reporters in Mexico City ahead of a meeting yesterday of finance officials from the G20 nations.
He said that he expected “a high take-up” among bondholders.
The swap is required to secure the European bailout and is geared toward averting the collapse of the Greek economy and default by a member of the euro. The exchange must be completed before March 20, when the country has to redeem 14.5 billion euros of bonds. In return, Greece has promised 3.2 billion euros of public-spending cuts.
The nation’s debt was forecast to balloon to almost double the size of its shrinking economy this year without the write-off, the European Commission said in November.
There’s a “titanic” effort under way to push through plans to reduce wages for civil servants and cut spending on defense, education and healthcare, Greek Prime Minister Lucas Papademos said on Friday at a Cabinet meeting in Athens.
Investors will forgive 53.5 percent of their principal and exchange the remaining holdings for Greek government bonds and notes from the European Financial Stability Facility (EFSF). The coupon on the new bonds was set at 2 percent until February 2015, 3 percent for the following five years, 3.65 percent for 2021 and 4.3 percent until 2042.
Bondholders will exchange 31.5 percent of their principal into 20 new Greek government bonds with maturities of 11 to 30 years and the remaining 15 percent into short-dated securities issued by the EFSF. The new securities will be governed by British law.
Fitch Ratings on Wednesday cut Greece’s credit grade two levels after the country got approval to proceed with the exchange, reducing the long-term foreign and local currency issuer default ratings to “C” from “CCC.”
“The proposal to reduce Greece’s public debt burden via a debt exchange with private creditors will, if completed, constitute a rating default,” Fitch said in a statement. “The exchange, if completed, would constitute a distressed debt exchange.”
Fitch said the country would get a “restricted default” rating after the swap starts, one level above “default.”
Once the transaction is completed, it will be moved out of that category and “re-rated at a level consistent with the agency’s assessment of its post-default structure and credit profile,” Fitch said.