October 26, 2011
The fight over how much investors holding Greek government bonds should lose is akin to the question of how long is a piece of string. The answer is a guess, no matter how painstaking the assumptions used. That is not the only issue. The way private holders are forced to take their losses is as important. It could show how the authorities propose to deal with any other eurozone sovereign default.
Assume that investors agree to swap existing debt for new bonds. Assume, too, that these new bonds will be worth far less than the 21 per cent cut in net present value being offered under the existing restructuring plan. Many will have no choice but to accept. However, since so-called liability management exercises never get 100 per cent acceptance, some investors will not accept the swap offer, betting that they will eventually be repaid in full. What should be done about them? One answer, assuming that the swap goes ahead, would be for Greece to default on the portion of bonds owned by the hold-outs. That would trigger the pay-out of credit default swaps.
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