"Eurozone Special" Bond markets wary as Greece offers debt deal

GREECE has announced plans to slash its outstanding debts by more than 50 per cent, even as a top credit rating agency warned that aspects of the deal could further destabilise Europe's government bond markets.

In what the International Monetary Fund has called the largest debt restructuring ever, the Greek Finance Ministry posted its offer to investors on a website set up to manage it. Under the terms of the deal, existing Greek bonds can be swapped for a new 30-year note worth 31.5 per cent of the face value, plus a second short-term security worth another 15 per cent that is backed by the entire euro zone and is meant to be as good as cash. Greek officials hope private investors will choose to accept a steep write-down in the value of their bond holdings to avoid even worse losses if the country were to default. If enough investors participate, the exercise would reduce the country's outstanding debts by as much as €107 billion ($134 billion) and help clear the way for a €130 billion package of new loans from the rest of Europe and the IMF. If the bond exchange falls short, the new international loans will be in doubt and Greece's economic crisis would intensify, with a government default likely by late next month. About 90 per cent of Greece's outstanding $260 billion in privately held bonds will need to be included in the bond exchange for the deal to move forward, according to the terms announced by the Greek Finance Ministry. Although the debt swap is meant to be voluntary, Greek MPs in recent days changed the law to require that any holdout investors be forced to participate if a majority of investors, representing two-thirds of the outstanding bonds, agrees to the exchange. The debt swap has been negotiated in recent weeks between Greek authorities and a committee representing banks, pension funds and other large investors who hold the bulk of the outstanding debts. Charles Dallara, managing director of the Institute of International Finance and a lead negotiator for the investors, said he was confident the debt swap would succeed. ''We remain quite optimistic that once investors study this proposal.there will be high take-up,'' said Mr Dallara, who is in Mexico this weekend for a round of meetings of G20 finance ministers. Standard & Poor's said Greece's debt exchange could harm other European governments. The deal exempts from losses some $80 billion in bonds accumulated by the European Central Bank early in the crisis. S&P argued that has created a new class of bond that in turn could discourage investors from buying the bonds of countries such as Italy or Spain.