Greece Creditors Must Give €30 billion to Bailout

Euro-zone governments have reached a tentative deal on a new financing package for Greece that will seek roughly €30 billion in contributions from the country's private-sector creditors, senior euro-zone officials said Saturday.
The 17 euro-zone governments will ask Greece's creditors to exchange their soon-to-mature debt for debt with a longer maturity, a process that could begin as early as July after finance ministers approve the new Greek aid package at their meeting June 20, officials said.
The governments will give Greece new lending, to be provided by the European Financial Stability Facility, the euro zone's sovereign rescue fund, officials said. But that financing will likely come with the condition that the banks, pensions funds and other investors holding Greek bonds agree to exchange them for new bonds with a longer maturity to help fill Greece's financing gap over the next three years, they said.
"Private investors would have a strong incentive to participate, because if they don't, there will be a default," said one official.
Officials say the new financing being discussed for Greece also will be contingent on Greece undertaking additional measures, such as passing new budget cuts and pursuing €50 billion in state-owned asset sales.
When euro-zone governments and the International Monetary Fund agreed to provide €110 billion in loans to Greece in May 2010, they expected that Greece would be able to raise long-term funding from financial markets again in 2012. But with yields on ten-year Greek debt over 15% and its debt still mounting, that option has been ruled out.
The EU and the IMF in February estimated that Greece would need €44 billion in long-term financing from the start of 2012 through the first half of 2013. The officials wouldn't discuss how much new financing could be provided by the rescue fund and the IMF in addition to the €30 billion they are expecting from Greece's private creditors.
The governments are also looking to the European Central Bank to encourage the exchange offer by accepting the new Greek bonds as collateral for lending while refusing to accept the old ones, the officials said.
The ECB has opposed more coercive measures aimed at getting Greece's private-creditors to continue providing financing for the country starting in 2012. But the debt-exchange process envisioned by the governments won't rewrite existing bond contracts or trigger a credit event, the officials said, partly easing the ECB's concerns that private creditors are being forced to contribute financing.
"If all the governments agree, it will be difficult for the ECB not to go along," one official said.
The new bonds are unlikely to receive collateral or preferred status, the officials said. The maturity of the new bonds is still to be decided, though officials say it will probably be somewhere between 3.5 and 7 years.
The coupon on the new bonds is also still under discussion, but one official said it would be close to the rate charged by euro-zone governments for financing from the rescue fund.
Standard & Poor's Friday said in a report that for issuers rated at Greece's level, single-B, a "voluntary" debt exchange would likely be default if creditors received securities with terms less favorable than are available in the secondary market. With 10-year Greek debt yielding 15% in the secondary market and two-year debt yielding over 20%, that is almost certain to be the case under the exchange process planned by euro-zone governments.
Officials say that they are willing to accept a downgrade of Greece by the credit-rating agencies due to the exchange offer—so long as a "credit event" that would require payouts to holders of Greek credit-default swaps isn't triggered.
The exchange offer will be targeted at all Greek bond holders, not just Greek banks, one official said.
"You'd need to focus on Greek and non-Greek creditors," he said. "It's unfair if you don't, and [otherwise] it's also probably impossible to administer the program."
The "troika" of the European Commission, the ECB and the IMF on Friday finished their fourth review of Greece's implementation of the adjustment program.
They indicated that Greece would receive the next slice of bailout financing in July, despite failing to meet some of the fiscal targets set last year under the program.