Greek debt deal set to cost RBS £825 million

ROYAL BANK of Scotland is set to lose £825 million of taxpayers’ money in Greek debts, after major financial institutions holding the stricken eurozone country’s bonds agreed to take part in a debt relief programme.

Twelve of the biggest investors exposed to Greek debt – none of which are based in the UK – are to participate in a programme that will see them forfeit about 75 per cent of the value of their overall bond holdings.

Although no UK banks have yet signalled they plan to take part, a second tranche of institutions – including 83 per cent taxpayer-owned RBS – is expected to sign up to the so-called “haircut” in the next few days, as smaller investors decide whether to join the deal.

A spokesman for RBS said: “We have not yet indicated whether we will take up the offer. It is currently under consideration.”

Such a move would see the bank lose £825m on the £1.1 billion of bonds it holds. The bank has previously signalled it is receptive to deals that would resolve the crisis.

RBS has already written down 79 per cent of the debt it is owed by Greece in its last set of accounts. Therefore, the latest deal with the major banks would actually leave it in a marginally better financial position than the worst-case scenario envisaged by banking bosses.

Yesterday’s statement from the Institute of International Finance (IIF) comes amid concern that too few investors will voluntarily swap their Greek government bonds for new ones with a much lower face value, longer repayment deadlines and lower interest rates.

Without the debt relief, Greece will not get a second, €130bn (£108bn) bail-out from the other euro countries and the International Monetary Fund, and face a messy default on its debts later this month.

Private creditors have until 8pm on Thursday to indicate whether they will be willing to sign up for the bond swap, which could slice as much as €107bn off Greece’s €350bn debt pile.

Although investors who participate would lose about 75 per cent of the value of their overall bond holdings, without the bail-out, they could face much bigger losses – not only on their Greek holdings but also on investments in other vulnerable eurozone countries, the value of which could tumble in any ensuing turmoil in financial markets.

“For as long as taxpayers continue to prop up RBS, they will be exposed to the fallout from the eurozone crisis and other bad deals the bank made before the financial crisis,” said Robert Oxley, of TaxpayerScotland.

“RBS must focus on paying back taxpayers as soon as possible so shareholders have a choice to sell their shares if they disagree with the bank’s investment decisions, such as this proposed haircut.”

The IIF said the 12 big investors that have promised to participate in the plan include German insurer Allianz, French bank BNP Paribas, Germany’s Commerzbank and Deutsche Bank, as well as Greece’s Euro-bank EFG and National Bank of Greece. It did not say how much Greek debt these institutions held.

“A deal of this nature has been on the cards for some time,” said Iain McMillan, director of CBI Scotland.

“However, it is clear that the financial institutions involved have already made provision to cover their losses on Greek bonds.”

The participation of these big investors does not come as much of a surprise, as they were closely involved in negotiating the deal. Many of them have close links to eurozone governments, which will be funding the bail-out.

The bigger question will be whether less traditional bond investors, such as hedge funds that bought the bonds at a steep discount or may stand to profit from bond insurance payouts, will also sign up.

If not enough institutions participate voluntarily, Greece has threatened to withdraw the deal – a move that would automatically lead to an uncontrolled default.

Greek politicians have said they want investors holding 90 per cent of the debt in private hands to sign up to the deal, but that a participation rate of at least 75 per cent may be acceptable.

In addition, the parliament in Athens has passed legislation that could allow a majority of 66 per cent of investors to force the deal on potential hold-outs.

That, however, could trigger payouts on so-called credit default swaps – complex financial products that act as bond insurance – which the eurozone fears could cause panic on financial market.

Stephen Lewis, chief economist at Monument Securities in London, said the fact that the 12 institutions had promised to participate was nevertheless “a hopeful sign”, since they would not have been included in the IIF panel that helped to negotiate the deal if they did not hold a substantial amount of Greek debt.

Greek finance minister Evangelos Venizelos warned private creditors in Athens the bond exchange was the best deal they would get and that he would not hesitate to activate laws forcing losses on bond holders who did not willingly sign up.

“Whoever thinks that they will hold out and be paid in full, is mistaken,” he said. “We are ready to activate CACs [collective action clauses to enforce losses] if needed.”

Mr Venizelos said he was optimistic of a participation rate of more than 90 per cent, with investors lured by the sweeteners offered – a cash equivalent up-front payment, a GDP warrant offering higher interest if the Greek economy does better than expected and equal treatment for the new bonds with the public sector.

The exact holdings of private investors are difficult to estimate, since they may have sold off some of their Greek bonds in recent months. But Mr Lewis reckoned that large banks might hold some €50bn to €75bn in Greek bonds, while insurers may hold €25bn to €50bn.

If not enough institutions participate voluntarily, Greece has threatened to force losses on those holding out or to withdraw the deal – a move that would automatically lead to an uncontrolled default.

Greek politicians have said they want investors holding at least 90 per cent of the debt in private hands to sign up to the deal.

If that level is not achieved by Thursday night, Athens could extend the offer by a few days and would then face several options, depending on the participation rate.