March 8th, 2012
12:38 PM GMT
London (CNN) – Greece’s private creditors will be frog-marched into taking a massive cut in the value of their investments on Thursday as the country again attempts to emerge from its financial hole.
After weeks of brinkmanship and last minute threats, Greece appears likely to force the deal on its creditors by invoking a collective action clause. The clause means creditors who want to hold out can be forced into the deal against their will.
Major creditors - including a committee of investors representing around 40% of the debt - have said they will participate.
But other parties, including creditors who hold bonds under foreign law and have stronger legal protections, may see benefits in holding out.
The deal is tough but unlikely to be bettered given Greece’s precarious financial position. Despite that, investors may gamble that the threat of a legal challenge, for example, could result in higher payouts.
Those who participate will be left with new bonds worth about half the value of the old ones. Greece will be relieved of €100 billion ($132 billion) of its obligations and move toward getting its second bailout, worth €130 billion.
But the use of coercion is expected to trip payment of Greece’s credit default swaps, a type of insurance written against the country’s debt in the case of default. Such a twist is likely to send tremors though the political landscape.
There is a relatively small $3.2 billion worth of credit default swaps, compared to the country’s €206 billion pile of privately held debt. But paying out insurance designed to protect an investor against a country’s ability to pay its bills will again raise questions about the eurozone’s stability.
For the financial markets, where uncertainty around the crisis has led to extreme volatility, the paying out of swaps will be "cathartic," one trader noted to CNN. An answer of sorts to the Greek situation - a clear and defined default - would give some clarity.
But in an environment where the financial markets have held huge sway over the political stage, the ongoing rhetoric from Europe’s leaders will need to be delicate as they seek to maintain the momentum of the debt crisis plan.
As Investec's Elisabeth Afseth points out, there will be one thing they will no longer be able to deny: Greece has defaulted on its debt.
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