Collateral demands could trigger €18bn Greek default

FINLAND’S demands for collateral on loans to Greece may trigger a default on €18 billion of bonds sold by Europe’s most-indebted country.

The securities, which represent less than 7% of Greece’s €286bn of bonds, are governed by English, not Greek, law and include conditions that insist on equal treatment for all investors.

Giving collateral to Finland as a condition for aid may breach the requirement that fresh debt doesn’t win repayment priority over existing notes.

“I am pretty sure the Greek government didn’t even know this; their incompetence is legendary,” said Andreas Koutras, an analyst at InTouch Capital Markets. “One should be very careful when giving securities or other collateral, like the Greek government is with the Finns.”

Finland said this week it is open to renegotiating last week’s agreement to take collateral in exchange for contributing to Greece’s second bailout, after a backlash prompted similar demands from countries including Austria and the Netherlands.

Greece’s 10-year yield climbed to a eurozone record of 18.54% yesterday, driving the yield gap to German bunds to 16.27 percentage points, also a record.

Tim Haywood, a London-based fund manager who helps oversee about $68bn at GAM Holding’s asset management arm, owns the Greek bonds issued under English law. According to terms of the floating-rate notes due in May 2012, he is ranked equally with Finland and other creditors that are claiming priority.

“It is my fervent hope we will be fully repaid,” Haywood said. “If not, I expect no one else to be.”

Greece received a three-year, €110bn rescue in 2010 from the EU and IMF.

Greece sought another bailout this year as its economic woes stymied plans to return to the markets in 2012 and private investors were asked to participate.

The plan offers bondholders four options to exchange their sovereign debt at a discount for fully or partially collateralised notes.

Providing collateral to lenders seeking agreement on terms for €159bn of additional aid risks making the new loans senior to the existing international bonds.

The Finnish government said earlier this month it reached an accord on collateral to ensure its contribution to the bailout is repaid.

By giving in to demands for collateral, Greece risks triggering the so-called negative pledges in the documentation of the international bonds.