Greece expects to implement a deal with private creditors to swap their holdings of Greek bonds with longer-dated securities next month, the country's deputy finance minister said in a television interview Tuesday.
Speaking on the privately owned Mega television channel, Deputy Finance Minister Philippos Sachinidis said bond holders would be offered four choices for trading in their existing Greek government bonds for 30-year debt.
Last week, European Union leaders agreed to a new €109 billion ($156.70 billion U.S.) assistance program for Greece to cover its financing needs for the next several years. Central to the Greek plan is a distressed-debt exchange whereby the country's private-sector creditors agree to accept new bonds worth less than their original holdings.
The plan aims to swap around €135 billion in Greek bonds that mature between August 2011 and 2020 -- equal to a little over a third of Greece's €350 billion stock of public debt—in return for new 30-year debt.
The creditors will have a choice of bonds: some will come with a lower coupon but will preserve investors' principal; others entail a loss of principal but earn more interest.
However, the new bonds will also come with a guarantee on the principal, though not on the interest, according to Mr. Sachinidis. Of the €109-billion package, €35 billion will be used to buy collateral that serves as insurance on the bonds newly issued in the exchange.
The Institute of International Finance, an industry trade group that negotiated for banks and financial institutions, estimates that half of the €135 billion exchanged will be for new bonds with a 20% discount—in other words, €13.5 billion will be sliced off Greece's debt load. That debt reduction, combined with the extension in Greece's debt maturity as a result of the swap, will greatly reduce the country's immediate financing needs for the next 10 years.
Just as significantly, Greek banks -- which hold about €55 billion in Greek government bonds -- should be able to use the newly guaranteed debt to open credit lines on Europe's interbank market.
Since the start of the crisis early last year, Greece's banks have been effectively frozen out of the interbank market because of fears over the creditworthiness of their bond holdings. As a result, they have become increasingly reliant on the European Central Bank for their liquidity needs, which has also forced them to cut back lending to Greek businesses and households, further deepening the country's recession.
On Monday, ratings agency Moody's Investors Service cut Greece's credit rating three notches deeper into junk territory, warning that such an exchange would constitute a default. On Friday, rival agency Fitch issued a similar warning.
Despite that, Greek Finance Minister Evangelos Venizelos told bankers in Washington, D.C., this week that he expected private-sector participation in the program to reach at least 90%, describing the goal as "very ambitious," according to remarks released by the Greek Finance Ministry in Athens.
In a speech to the IIF, Mr. Venizelos said that the first official talks with private lenders would begin in Athens on Thursday.
