Global banking group confident on Greek debt swap

WASHINGTON Wed Sep 7, 2011 12:21am BST

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WASHINGTON (Reuters) - A global banking group that is leading a proposed Greek bond swap said on Tuesday it is confident the plan will eventually garner the necessary investor support, despite the challenges faced.

"Initial discussions, which are being held with investors, are quite encouraging, and we remain confident that hurdles and obstacles can be overcome, and an agreement can be reached to implement this deal," Charles Dallara, managing director for the Institute of International Finance, told reporters.

Greece said last week it would not go ahead with the debt swap if holders of fewer than 90 percent of the bonds participate; signs so far are that the only 60-70 percent are willing to take part. The Greek Ministry of Finance on Tuesday, however, said it expects the deal to be successful.

Dallara acknowledged there were challenges with completing the deal "that have to do with European politics by and large," but expressed confidence they could be overcome.

Other problem areas, he said, included the need for parliamentary approval of various elements of the deal by some euro zone countries, collateral for additional loans for Greece, and weakness in the Greek economy.

He said the IIF was currently exchanging information on the various options for the debt exchange with European regulators and investors before a formal offer would be made.

The proposal aims to ease Greece's debt burden by swapping bonds with a maturity of up to 10 years for 30- or 15-year bonds with additional guarantees that make them less risky to hold than the original bonds.

The four bond exchange options under consideration are designed to impose uniform losses of 21 percent, in net present value terms, on debt holders as part of attempts to share the burden of a second bailout deal for Greece.

"We feel confident that when a broad range of investors see the full range of options before them and understand it fully, which will take some weeks,...that the support for this deal can be very strong," Dallara added.

The Greek Finance Ministry in a statement said it was optimistic the process would be successful.

"The Greek Ministry of Finance is encouraged by the widespread expressions of interest in its proposed transaction," the ministry said in a statement.

"The Hellenic Republic looks forward to making a formal offer to its private sector creditors in October and has every reason to believe that the transaction will be a success," it added.

EU leaders agreed on July 21 to extend a second, 109 billion euro bailout to Greece, on top of a 110 billion euros rescue package agreed in May 2010.

Dallara said the July 21 agreement could "provide a small underpinning to continued Greek economic reform" and reductions in Greek debt over the next couple of years.

Germany and other euro zone states have urged parliaments to pass the bailout quickly, but there have been signs of problems including a row over the provision of collateral for the additional loans.

Senior EU, European Central Bank and International Monetary Fund officials interrupted talks with Greece last week over a new loan tranche after disagreement over why Athens had fallen behind on cutting its budget deficit.

FORCED RECAPITALIZATION

The IIF, which represents more than 400 private-sector banks worldwide, also weighed in on recent remarks by IMF Managing Director Christine Lagarde that called for a mandatory recapitalization of European banks in the face of weakening global growth.

Dallara said financial markets were not worried about bank capital, though they were concerned with commitments by some European governments to meet revised fiscal targets and the overall debt of euro zone states.

There is no "broad-based need for forced recapitalization," he said. "The number of banks in Europe which would be in need for such forced recapitalization are, in my view, very, very limited indeed, and they are limited to small and medium-sized institution."

Markets, however, need to be reassured over the trajectory of fiscal reform in Europe. "Obviously many banks have exposures to these sovereigns but the answer is not to try to force capital," he said.

Philip Suttle, IIF's chief economist, said market conditions were not conducive to raising capital, with bank equity already expensive and growing costlier.

(Editing by Leslie Adler)

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