Saturday, March 10, 2012

Greek Debt Swap Deal.


Greece has effectively reduced its debt by €100 billion (Rs6.6 lakh crore) and has secured €130 billion of bailout funds from the European Union (EU). It has achieved the debt reduction and secured the bailout funds by swapping existing debt of €206 billion for new debt. The bondholders, including European banks, insurance companies, asset management companies, pension funds and others, have agreed to a 53.5% haircut on the existing debt in return for the new debt, with new terms.We break it up all for you:
Q: What is the debt swap deal?
A: The debt swap deal is an arrangement between private sector Greek bondholders, whose total holdings is €206 billion, and the Greek government. The bondholders surrender their Greek bonds (issued under Greek law and foreign laws) to the government in return for new bonds.
Q: How does the swap affect the bondholders?
A:
Bondholders take a loss on their principal investment. In very simple terms, a bondholder holding €100 worth of Greek bonds will surrender the bonds and receive bonds and cash equivalent to €46.5. In bond market terms, the loss to the bondholder will be 70% if calculated at NPV (net present value; or present value of future money) terms, though arithmetically it’s a lesser loss of 53.5%.
Q: How will the swap benefit Greece?
A: 
This helps Greece write down the value of its debt by around €100 billion and it will secure €130 billion in bailout funds from the EU. Greece will use the €130 billion to pay cash to bond holders participating in the deal, redeem bonds maturing in March, buy back bonds from the European Central Bank and use it for its own economy.
Q: How will it impact markets?
A: 
Financial markets will now not have to worry about a Greek default on its debt and the country going out of the euro. Markets can focus on liquidity infused by the ECB (over €1 trillion in the last three months through LTRO or Long Term Refinancing Operations). The liquidity will go into speculative buying of risk assets.
Q: What is the impact on India?
A: 
Indian markets will see more risk appetite from foreign investors, leading to more flows into the country. FIIs have already pumped in over $6 billion into Indian equities in January and February, and will continue to do so given the cheap liquidity generated by the ECB’s moves.

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