Eurozone delays Athens rescue funds

By Peter Spiegel in Brussels, Kerin Hope in Athens and Richard Milne and David Oakley in London

Eurozone members have delayed approval of more than half of the €130bn bail-out for Greece after deeming that Athens has yet to meet all the terms set as the price of a second rescue.

However, finance ministers from the 17-country currency bloc meeting in Brussels signed off on funds to underpin a €206bn debt swap to cut the value of the Greek bonds held by private investors.

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The debt swap is due to be completed by the middle of the month in order to stave off a default that would send fresh tremors through the eurozone.

Jean-Claude Juncker, the Luxembourg prime minister who chairs the eurogroup, said Greece’s official creditors would “finalise in the next few days” an assessment of Greece’s steps to enshrine the bail-out conditions into law.

But he added that the full bail-out would only be completed on a successful completion of the debt swap with private bondholders.

The ministers decided that Athens had yet to meet all the conditions to secure the €71.5bn portion of the bail-out destined for the Greek government. The balance of the rescue funds – which, when combined with other incentives and instruments to be used in the debt swap comes to some €93bn – was agreed.

The move to split the rescue funds did not appear to faze officials in Greece, where wrangling over the bail-out terms has plunged domestic politics into turmoil ahead of elections.

“Overall it was quite positive, our progress was recognised,” one Greek official said.

The finance ministers’ decision came as an industry body ruled that billions of dollars in credit default insurance will not be paid out to investors in Greek debt.

The International Swaps and Derivatives Association earlier turned down two requests for a pay-out to be triggered over the debt swap. It decided there had not been a so-called “credit event” yet in Greece but left the door open for a different decision in the future.

The body’s determinations committee rejected requests it declare a credit event on grounds that the European Central Bank was being given de facto seniority in a controversial debt swap and that Greece was introducing legislation that would require any recalcitrant bondholders to take part in the swap should support for the deal pass a certain level.

However, the ISDA committee said: “The situation in the Hellenic Republic is still evolving and today’s ... decisions do not affect the right or ability of market participants to submit further questions ... nor is it an expression of the [committee’s] view as to whether a credit event could occur at a later date, in each case, as further facts come to light.”

The question of whether Greece’s debt restructuring would trigger a credit event has sparked intense debate about the value of the fledgling CDS market.

Bill Gross, co-founder and co-investment officer at bond investment group Pimco, said if he was a holder of a Greek CDS he would be “upset” with the outcome of the ISDA meeting.

Speaking on CNBC, Mr Gross likened a Greek CDS not paying out to a flood protection insurance policy that failed to pay out in the event of a flood.

The Greek debt swap has been structured as a voluntary deal, in part to avoid triggering CDS. But in recent months as Greece’s financial situation has deteriorated rapidly it has become clear that all of its bonds held by private investors need to be included in the swap to help bring its debt burden down meaningfully.

Sovereign CDS have been used by banks to hedge their exposures to a number of countries’ bonds as well as by other investors wanting to bet on the chances of Greece defaulting. But there have been growing fears that the convoluted nature of the Greek debt swap might not trigger a credit event and could therefore make sovereign CDS worthless.

The value of net CDS outstanding on Greece has collapsed in recent months amid these fears, and stands at $3.2bn, down by more than 90 per cent from its peak.