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Greece closes in on target in bond swap deal
The complex bond swap, known as the Private Sector Involvement, or PSI, is critical for Greece to secure its second bailout — a 130 billion euro ($171 billion) package of rescue loans from other eurozone countries and the International Monetary Fund.
The Institute of International Finance, which has been negotiating on behalf of large private creditors, said 32 firms holding 84 billion euros ($111 billion) of Greek bonds have signed up, including major German, French, Greek and Cypriot banks. German reinsurer Munich Re, which holds some 1.6 billion euros ($2.1 billion) in Greek bonds, also will participate.
Another 17.5 billion euros ($23 billion) in bonds owned by Greek social security funds but managed by the central bank also will be part of the swap. Eight Greek social security or pension funds holding 3.2 billion euros ($4.2 billion) in bonds have signed up to the deal, while another six, who hold 3.4 billion euros ($4.5 billion), have voted against. The holdouts include funds for journalists, police, lawyers, doctors and civil engineers.
Some other creditors, notably hedge funds, are also expected to hold out, with some expecting to profit from payouts of so-called credit default swaps (CDS).
CDS are complex financial products, in which the CDS seller pays the CDS holder in case of default of some underlying assets, such as a government bond. Initially created as a type of bond insurance, credit default swaps also have been used by speculators who do not own the underlying asset but hope to profit from a default nevertheless.
Eurozone leaders and the European Central Bank wanted the Greek bond swap to be entirely voluntary to avoid a CDS payout, which they fear could create a cascade of losses in an already shaky financial system.
However, the International Securities and Derivatives Association, the organization overseeing CDS, says the actual payouts on credit default swaps linked to Greek bonds will be less than $3.2 billion.
The president of the German Banking Association, Andreas Schmitz, said he doesn’t expect the bond swap — even if it results in a CDS payout — to cause turmoil.
“The consequences won’t hit the market as hard as many thought even a short while ago,” Mr. Schmitz said Thursday. “I think that the market today will react quite rationally.”
Gabriele Steinhauser in Brussels and Jovana Gec in Belgrade, Serbia, contributed to this article.
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White House pets gone wild!
Let it snow