Greece default risk returns as bond maturity nears

Athens Two months after forcing through the biggest-ever sovereign bond restructuring, Greece once again faces the prospect of becoming the first developed nation to default on its debt.

The government taking office after this weekend's election has 30 days to decide whether to make today's interest payment on 20 billion yen (Dh920 million) of 4.5 per cent notes maturing in 2016, or default. Then, by May 15, officials must decide if they're going to repay the €436 million (Dh2.08 billion) due on a floating-rate note issued a decade ago.

These are among about €7 billion of bonds whose holders took advantage of being governed by foreign rather than Greek law to sidestep losses suffered under the private-sector involvement rescheduling, or PSI. Paying the holdouts in full would arouse the ire of Greek taxpayers, as well as investors who cooperated with PSI. A failure to pay would signal Europe's debt crisis is worsening.

"This poses a real challenge," said Mario Blejer, vice chairman of Banco Hipotecario in Buenos Aires, who ran Argentina's central bank in the aftermath of his country's default. "If they pay, the new emerging government will be fiercely criticised for paying the foreigners in full after imposing huge losses on small domestic savers. If they don't pay, they can expect much litigation, as we have experienced here in Argentina."

Greece agreed in March to exchange more than €200 billion of bonds for notes with longer maturities and lower interest rates under PSI, cajoling private investors to forgive more than €100 billion and opening the way for the nation's international bailout.

"It's default or pay up," said Gabriel Sterne, an economist at Exotix Holdings Ltd. in London and a former International Monetary Fund official. "There are no other options. It's too late."

The 2023 government bonds Greece issued in the exchange are priced at 20.7 cents on the euro to yield 23.1 per cent.