Greece threatens default on PSI holdouts Greece threatened to default on any of its bondholders who do not take part in this week's €206bn debt swap, raising the pressure on potential holdouts. The Greek public debt management agency said in a statement that Athens "does not contemplate the availability of funds to make payments to private sector creditors that decline to participate in PSI." The threat is aimed in particular at the 14 per cent of investors who own Greek bonds issued under international law. The remaining 86 per cent, who own bonds covered by Greek law, were warned in the same statement that Greece would use so-called collective action clauses to make any deal binding on any holdouts. That would almost certainly trigger credit default swaps, something that made many European policymakers very nervous until recently. A Greek debt restructuring would mark the first time in more than 60 years that a western nation had defaulted. People involved in the deal said there would be no sympathy for any holdouts in the international law bonds, as many of them were hedge funds who had bought in on the hope of being paid back in full as other investors suffered losses of about 75 per cent. They will be portrayed as evil hedge funds and nobody will have any pity for them. That means you can be violent with them. They need to realise that they don't have a free option here," one person close to the deal said. Charles Blitzer, former assistant director of the IMF's capital markets division, said the announcement signalled for the first time Athens" intention to stop payment on any foreign-law bond that did not participate in the restructuring. "There is no commitment not to pay, but there is a threat," he said. Separately, the body representing a substantial number of Athens" private sector government bond holders warned that the cost of a Greek disorderly default and exit from the single currency could rise to €1tn. The International Institute of Finance said that the contingent liabilities - potential losses across the eurozone - of a disorderly default would probably be in excess of €1tn, in a confidential document to staff. The IIF wants bondholders to sign up for the bond swap deal by a deadline on Thursday, aimed at saving Greece more than €100bn and putting the country on a more stable footing. One senior investor said: "The IIF wants creditors to accept the Greek debt swap. They want to get a deal done. This could be considered as scare-mongering by the IIF. Another investor said: "The IIF wants to make sure bond-holders take part in this deal. But, having said that, a disorderly Greek default would definitely be very costly for Greece and the eurozone. Eurozone peripheral bond markets fell because of uncertainty over Greece amid unsubstantiated rumours that the debt swap, which is due for completion on Thursday, could be delayed. Italian 10-year government bond yields, which have an inverse relationship with prices, rose 13 basis points to 5.03 per cent and Spanish yields increased 17bp to 5.10 per cent. Additional reporting by Peter Spiegel in Brussels