If private holders of Greek government debt refuse to accept huge losses on the value of their investments, as much as $1.3 trillion could be drained from the already-staggering euro zone economy, an industry group warned Tuesday.
A plan presented by the Institute of International Finance, or IIF, which represents institutional bondholders, asks banks and other creditors to accept a 53 percent loss on their Greek bonds.
The plan, which IIF-represented holders must accept or reject by Thursday at 3 p.m. New York time (2000 GMT), is part of an elaborate arrangement that took seven months for officials of euro zone governments, the IIF and the International Monetary Fund to arrange.
If successful, the plan will slash Greece's bond indebtedness by $234 billion and, the IIF and its supporters hope, keep the country from defaulting on March 20, when its next bond redemption comes due. It also will allow the euro zone to remain intact and possibly preclude the need to offer financial bailouts to debt-laden Portugal, Ireland, Spain and Italy.
But if the plan is rejected, the IMF will withdraw from the arrangement and the consequences for Europe will be acute.
The IIF warned in a memo of "very important and damaging ramifications that would result from a disorderly default on Greek government debt," meaning a failure of the IIF plan, Reuters reported.
"It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed €1 trillion ($1.31 trillion)," the memo said. Also, the European Central Bank would suffer substantial losses.
There are three possible outcomes for the IIF plan, one of which will be clear by Thursday:
- If less than 75 percent of the debt is voluntarily tendered for the loss, Greece will default on March 20 when a bond redemption is scheduled.
- If between 75 percent and 90 percent of the debt is tendered, Greece will invoke a so-called collective action clause in its bond covenants that will force bondholders who refuse to accept a cut in the value of their securities to take that cut anyway. Under this scenario, Greece wouldn't default on March 20.
- More than 90 percent of bond holders voluntarily accept the 53 percent loss in the value of the securities, so Greece wouldn't default on March 20.