Louisa Gouliamaki/AFP/Getty Images
People walk past the Bank of Greece headquarters in Athens. Greece toughened its stance to push creditors to accept a debt swap and take heavy losses, just one day before the Thursday deadline for completion of the deal to avert default.
Stock prices rebounded somewhat Wednesday, one day after their biggest sell-off of the year. What caused prices to plunge Tuesday was an all-too-familiar problem: the Greek debt crisis.
European officials have cobbled together a deal to keep Greece from defaulting, and investors all over the world who hold Greek bonds are weighing their options. They're worried about what could happen if they reject the deal.
"There's an offer on the table, and the bondholders have been given a deadline," says Richard Portes, professor of economics at the London Business School. He says bondholders have until 3 p.m. ET Thursday to decide whether to accept the deal being pushed by European leaders.
How much debt does Greece have?
In total, the country owes its creditors about 350 billion euros ($460 billion). The goal of the bond swap deal is to reduce Greece's debt from 160 percent of gross domestic product to 120 percent.
How much will this deal get rid of?
If the bond swap goes forward, it would reduce Greece's debt by about 107 billion euros ($141 billion). On top of that, the country would receive 130 billion euros ($171 billion) in bailout money from the EU and IMF, but Greece only gets the bailout if the swap deal happens.
Who owns these bonds?
A variety of investors. Some are Greek, some are state-owned, some are private, some are foreign. Complicating the situation, there are different rules for different kinds of investors about when and what they have to agree to. Some are already onboard, and some are not.
How much will the investors lose?
In total, about 107 billion euros. Officially, the deal decreases what bondholders are owed by 53.5 percent, but with more time to pay and lower interest rates, the loss could be closer to about 70 percent.
Why is it called a bond swap, and not a bond reduction?
Technically, the investors would be trading in the old bonds for new ones with lower values.
Will this fix the Greek debt crisis?
Probably not. But it might get the country on the right path. As a condition of the bailout money, and the bailouts Greece received from the EU in 2010, the country needs to do a lot of work to tighten regulations and get the economy to bounce back, although it's unclear how or whether they will be able to do that. Especially when much of the Greek public is strongly opposed to the austerity measures.
— Natalie Jones
Sources: AP, Bloomberg
"At this stage, there is a great area of uncertainty," Portes says. "And there often is in these matters, because you go right down to the deadline, because people are trying to figure out what other people are going to do and whether they'd be better off going along with the majority."
A Difficult Choice
The choice facing bondholders isn't a very good one. If they accept the deal, they have to take losses of as much as 70 percent of the value of their holdings. But if they reject the deal and try to fight it out in court, Portes says, most won't get anywhere.
"If you're holding a bond that's issued under Greek law, your chances of getting anywhere in the Greek courts are zero, or at least as close to zero as makes no difference," Portes says.
Potential holdouts face another hurdle because of a new law approved by the Greek government. If enough of the bondholders accept the deal, Greece has the authority to force most of the others to go along.
Hans Humes of Greylock Capital, who is representing bondholders in the debt talks, believes most investors will go along with the deal. He says bondholders may not like the position they're in, but there's not much they can do.
"The legal leg you stand on if you hold out is really fragile, and their legal advisers are far stronger in this area than any lawyer I've seen talking about potentially holding out, so holding out is not a good strategy," Humes says.
A Complicating Factor
But there's a wild card that could complicate matters. Some of the bonds were sold in other jurisdictions, so they're not covered by Greek law. About 10 percent of the bonds are said to be in that category. Portes says some bondholders also took out credit default swaps, which are insurance policies that reimburse them if Greece defaults.
"Some of the bondholders might actually be better off if they didn't accept it," Portes says.
No one is really sure how many people are in that category, but if Thursday's deadline passes and not enough bondholders have signed off, the whole deal could collapse. Such a prospect is what scared a lot of investors Wednesday. It's being called a "disorderly default." Greece would be unable to pay off its debts, and a lot of banks and institutional investors who own those bonds would suddenly see big losses.
"Greek banks own a lot of this Greek debt," Portes says. "If there's a default and nobody is around to recapitalize those banks, then it's disorderly, then it's seriously disorderly, and it would not be nice."
As of Wednesday, about 58 percent of Greek bondholders are said to have signed off on the deal. The question is what the rest will do. If a crisis is averted, it will be because the holdouts decide that accepting a big loss would be better than taking a chance on losing even more.