Greek default still possible as bond-swap deadline nears

As of Wednesday night, only 40.8 percent of bondholders - mostly European banks such as Deutsche Bank, ING or Royal Bank of Scotland - had taken up the offer of new bonds, said the International Institute of Finance, which negotiated the so-called private sector involvement (PSI) with the Greek government.

The institute - an umbrella organisation for banks and various investment funds - refrained from making any recommendation to holders of Greek debt. "Each such holder must make their own decisions on whether or not to participate in the debt exchange offers, based on their own particular interests and on the advice and assistance of their own advisers," it said.

Five small pension funds in Greece have announced they would not take part in PSI, despite warnings from the country's finance minister that the alternative is default.

If the PSI offers - to be placed by Thursday 21.00h Brussels time - are taken up by more than 66 percent of bondholders but still less than 95 percent, the Greek government can trigger so-called collective action clauses which would impose the PSI deal on the remaining naysayers.

This scenario is seen as most likely as it would allow Greece to tick the PSI box needed for eurozone finance ministers to rubberstamp the second, €130 billion bail-out on Monday.

But triggering retroactive losses on reluctant bondholders may still be considered a form of default or 'credit event' which EU leaders initially sought to avoid by any means since it could set a bad precedent for other troubled euro-countries.

The International Swaps & Derivatives Association (Isda), which determines if credit default insurance should be paid, is expected to hold a special meeting if collective action clauses are used in Greece.

In a note to investors issued in January, Isda said that the use of such a clause could trigger a "restructuring credit event" because "its effect would be to bind all holders of the relevant debt."

EU economics commissioner Olli Rehn on Wednesday urged hesitant banks to sign up to the Greek debt restructuring offer, noting that the alternatives are much worse.

"It is important that all investors recognise that Europe has committed the maximum funds available to this voluntary debt exchange and that full participation is necessary for the Greek programme to move forward," he said in a statement, in reference to the €35 billion sweeteners to accompany the PSI deal if it is successful.

"I therefore encourage Greek, European and all international investors to participate voluntarily in this Private Sector Involvement operation along the terms agreed on 21 February," he added.

Meanwhile, Germany's finance minister Wolfgang Schauble warned of the consequences of a PSI failure.

"If we cannot save the financial system in Greece it would be a disaster for people in Greece," Schauble told students at the European University Institute near Florence after meeting Prime Minister Mario Monti during a visit to Italy.

He said he had spoken "very openly" with his Greek counterpart about the country leaving the eurozone, but that it was better for Greece to stay.

"Maybe you could say it was the wrong decision for Greece to join the common European currency. Everybody knows that the real causes of problems for Greece and for the Greek people are in Greece and in Greek society and not abroad," he added.