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The Spanish investment fund Vega Asset Management has threatened to sue Greece if the country insists on a reduction of the face value of Greek government bonds greater than the initially agreed 50 per cent cut. In the middle of this week, the hedge fund withdrew from the negotiations for the Greek foreign debt haircut (Private Sector Involvement), although it is in the steering committee, which is negotiating with the government of Lucas Papademos the exchange of government bonds for new ones of lower value.

"Vega believes that, given the current position of the official sector, a voluntary exchange that implies a NPV loss of 50 per cent or less is not now a likely outcome," reads the letter by Jesus Saa Rekuejo, a senior company executive, quoted by the Financial Times. He adds that Vega Asset Management should start considering all possible legal options to prevent an NPV loss of more than 50% due to the Private Sector Involvement.

The Director of the Institute of International Finance Charles Dallara and Jean Lemierre, senior adviser to BNP Paribas, head the steering committee. The committee represents private financial institutions that should take part in the Private Sector Involvement and it is running the negotiations for a voluntary exchange of bonds. Vega Asset Management is the only representative of the committee that withdrew from the negotiations. The other members remain the representatives of Alpha Eurobank, AXA, BNP Paribas, CNP Assurances, Commerzbank, Deutsche Bank, ING, Intesa San Paolo, LBBW and the National Bank of Greece.

Vega is ready to take all necessary legal actions to prevent a possible cut of the Greek foreign debt larger than what has been agreed so far, because it could prove fatal for many lenders. There is still no official information that the value of the bonds held by private funds and financial organizations will be reduced by more than fifty per cent. However, many economic analysts argue that to reduce the debt to sustainable levels, it should be haircut by 70% - 80%.

Earlier this week, the Greek Minister of Finance Evangelos Venizelos said that the talks between the government and lenders are going very well and expressed his firm belief that the exchange procedure of Greek bonds will soon be successfully completed. Bankers, however, are not so optimistic. The International Monetary Fund did not hide its obvious surprise at Venizelos’ statements. Representatives of the institution made it clear that there are still many open questions to which there is no answer.

Lenders insist on reduced impact of power, urging Greece to give shorter maturity of the new bonds of reduced value, and greater interest rate. They insist on 20-year bonds and 8% interest rate. The government, on the other hand, wants 30-year bonds and an interest rate not higher than 4%. Analysts now see the golden mean in two options. The first option is for both parties to agree on a fixed rate of 5% for the maturity period of the bonds. The second option is to establish a 4% interest rate on condition that it will begin to rise when the country returns to positive growth.

About 70% of private institutions holding Greek government bonds agree to help Greece in haircutting its debt. However, the requested contribution is about 90%; otherwise, it is likely to apply the collective action clause. It will include conditions of the exchange like interest rates, maturity of new bonds, the percentage of cash to offset part of the exchange and other details that are crucial to the success of the deal. The collective action clause will apply to institutions that have not entered into negotiations, but hold Greek government bonds. Its presence in the process threatens the voluntary nature of debt restructuring, which could lead to a credit event and activate the CDS insurance market of the Greek government bond.