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Stock prices rebounded somewhat Wednesday, one day after their biggest sell-off of the year. What caused prices to plunge Tuesday was an all-too-familiar problem: the Greek debt crisis.
European officials have cobbled together a deal to keep Greece from defaulting, and investors all over the world who hold Greek bonds are weighing their options. They're worried about what could happen if they reject the deal.
"There's an offer on the table, and the bondholders have been given a deadline," says Richard Portes, professor of economics at the London Business School. He says bondholders have until 3 p.m. ET Thursday to decide whether to accept the deal being pushed by European leaders.
"At this stage, there is a great area of uncertainty," Portes says. "And there often is in these matters, because you go right down to the deadline, because people are trying to figure out what other people are going to do and whether they'd be better off going along with the majority."
A Difficult Choice
The choice facing bondholders isn't a very good one. If they accept the deal, they have to take losses of as much as 70 percent of the value of their holdings. But if they reject the deal and try to fight it out in court, Portes says, most won't get anywhere.
"If you're holding a bond that's issued under Greek law, your chances of getting anywhere in the Greek courts are zero, or at least as close to zero as makes no difference," Portes says.
Potential holdouts face another hurdle because of a new law approved by the Greek government. If enough of the bondholders accept the deal, Greece has the authority to force most of the others to go along.
Hans Humes of Greylock Capital, who is representing bondholders in the debt talks, believes most investors will go along with the deal. He says bondholders may not like the position they're in, but there's not much they can do.
"The legal leg you stand on if you hold out is really fragile, and their legal advisers are far stronger in this area than any lawyer I've seen talking about potentially holding out, so holding out is not a good strategy," Humes says.
A Complicating Factor
But there's a wild card that could complicate matters. Some of the bonds were sold in other jurisdictions, so they're not covered by Greek law. About 10 percent of the bonds are said to be in that category. Portes says some bondholders also took out credit default swaps, which are insurance policies that reimburse them if Greece defaults.
"Some of the bondholders might actually be better off if they didn't accept it," Portes says.
No one is really sure how many people are in that category, but if Thursday's deadline passes and not enough bondholders have signed off, the whole deal could collapse. Such a prospect is what scared a lot of investors Wednesday. It's being called a "disorderly default." Greece would be unable to pay off its debts, and a lot of banks and institutional investors who own those bonds would suddenly see big losses.
"Greek banks own a lot of this Greek debt," Portes says. "If there's a default and nobody is around to recapitalize those banks, then it's disorderly, then it's seriously disorderly, and it would not be nice."
As of Wednesday, about 58 percent of Greek bondholders are said to have signed off on the deal. The question is what the rest will do. If a crisis is averted, it will be because the holdouts decide that accepting a big loss would be better than taking a chance on losing even more.