Q&A: Greek debt swap

Leftist demonstrators hold a banner at the entrance to the Acropolis archaeological site, reading in English: 'End the governments of bankers'
Image caption Bankers and their financial instruments have been blamed for a lot of Greece's woes

Greece is poised to secure a deal with creditors to halve its massive debtload.

The country's government secured a second bailout worth 130bn euros (£110bn; $173bn) from the European Union and the International Monetary Fund last year and this was ratified last month.

But to get its hands on the money, it need to get its private sector lenders to agree to take a loss on what it owes them.

Otherwise it won't get the aid it needs to keep it afloat.

And that would mean the prospect of an imminent and disorderly default, and possibly even an exit from the euro.

How does the deal work?

Greece was bailed out to the tune of 109bn euros back in 2010.

But by the middle of 2011, it became clear that this was never going to be enough for Greece to pay off its massive debts as its economy shrinks.

So Greece's benefactors - the International Monetary Fund and the other eurozone governments - agreed a second bailout worth 130bn euros.

But one of the key conditions was that Greece would reach a deal with its existing private sector lenders to reduce its debt.

This would be done through a swap of old bonds with newly-issued bonds that would be worth a lot less and pay less interest.

After months of negotiations between the Institute of International Finance (IIF), which represents most of Greece's private sector creditors, and the European Central Bank - which also owns a lot of Greek debts as a result of efforts to prop up Greece's banks and its bond market - a deal was finally reached in February.

Private holders will take a 53.5% nominal loss on their Greek debt - which works out to a real loss of about 74% after taking into account the loss of future interest payments, and the extra time being given to Greece to repay its reduced debts.

That means Greece wipes out what it owes on more than half of its 206bn-euro mountain of debt.

The 107bn-euro losses - the "haircut" - being allocated to lenders, along with another huge package of public sector spending cuts, aim to reduce the Greek government's total indebtedness from 160% of GDP now to 120.5% by 2020.

What is the issue now?

As the deadline approaches, no-one is entirely sure if the deal will come to pass.

Major banks such as France's Societe Generale and Italy's UniCredit - both of whom have seen large write-downs on their Greek holdings trigger steep falls in their share prices - have said they will participate.

But others, including some Greek pension funds, have said they will not.

To add to the tension, the IIF - which agreed the broad terms of the deal - has refused to say how much Greek debt the members of its steering committee hold.

Members include banks BNP Paribas and Deutsche Bank, and insurer Allianz.

Reports have also said that a quarter of Greece's privately-held debts are owned by hedge funds, which can bet on declines in the markets, unlike mutual and pension funds.

No-one is quite sure what these secretive funds will decide to do.

Recently, a global financial body, the International Swaps and Derivatives Association, announced last week that the debt write-off would not constitute a default.

A ruling of a "credit event" - a default - would have meant insurance against bond losses, called credit default swaps, would have been paid out.

That was before the CACs were enforeced, however.

What needs to happen next?

Greece wants 90% of holders to accept the offer.

They think this is likely to happen because the deal has a few sweeteners - such as upfront cash payments, a guarantee on some of the debt repayments from the eurozone bailout fund, and a warrant offering a higher rate if the Greek economy does better than expected.

For the deal to pass, the take-up must be above 75%. This would allow Greece to activate a Collective Action Clause (CAC) in its bond contracts that would force the rest of its bond investors to accept the deal.

To complicate matters even further, the CAC rules differ between Greece's international bonds governed by English law, and its roughly 177bn-euros worth of bonds that are governed by Greek law.

Even if Greece manages to get past the 75% threshold, it would still consult with its bailout lenders and private sector lenders again if total acceptance is less than 90%.

This is because it wants to try to prevent a "credit event", which might happen if it uses the CACs to force lenders to accept losses.

If the overall acceptance for its Greek and English law-governed debt is less than 75%, then the deal is off and we are all back where we started.

And if the deal does not happen?

Greece is continually having to pay back what it owes to creditors, which adds urgency to all these conversations.

The nation's next big payment is due on 20 March, when it owes 14.5bn euros.

It cannot afford this unless it gets the money from the new EU and IMF bailout - and it cannot get that money without the debt swap.

So if the debt swap does not happen on Thursday as planned, Greece and its creditors would have to come up with a Plan B (or C) pretty quickly.

Or default.