The moment of truth is nigh for Greek debt talks. Or is it?
The Greek government has been locked in crisis talks with representatives of private sector holders of its debt all day, with further talks scheduled to run through the night.
Press reports suggest that the two parties may be inching closer to a deal, after the Institute of International Finance, which is leading negotiations on behalf of private sector creditors, is apparently willing to compromise on its previous demand that an annual coupon of 4-5% on the remaining outstanding debt would be the lower limit of an acceptable deal. The Greek government has been proposing a much lower rate of interest.
According to a report in the Wall Street Journal, citing EU and Greek government officials, IIF managing director Charles Dallara will propose that he would be willing to accept a lower initial coupon – of around 3.6%-3.7%, which would rise over time.
But even if such a deal is reached, it comes amid increasingly audible murmurs of discontent among private sector holders of Greek debt, a sizeable chunk of whom are not represented by the IIF in any case.
First, even among the banks, there is clearly a deep sense of bitterness at the way in which the talks have progressed. A quote from an unnamed banker, cited in the WSJ article, is telling:
| "There is nothing voluntary about all this," the banker said. "We have a gun pointing at our heads." |
To recap, it is imperative that any agreement reached is, technically at least, voluntary, as a non-voluntary restructuring would likely trigger credit default swaps. To quote the IIF’s latest Euro Briefing report:
| A non-voluntary debt exchange would only confer marginal additional benefits to Greece in terms of covering growing funding needs, but would impose disproportionately large additional financial losses on private creditors in net present value terms, as well as major negative spill-over effects on Greece itself and the Euro Area as a whole. A non-voluntary approach would underestimate both the costs of a disorderly debt restructuring and the benefits from a voluntary PSI deal. |
Second, though, the IIF report estimates that 25% of outstanding Greek government debt is held not by banks, the ECB or governments, but by foreign institutional investors and hedge funds, who are much less willing to accept any further concessions to the Greek government on the coupon rate, especially as many are known to hold credit default swaps on Greek debt that would pay out in the event of an involuntary default.
The 25% figure is interesting, as previous reports have only speculated on the proportion of institutional and hedge fund holdings of Greek debt (see chart below).
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In fact, according to a report in the New York Times on Thursday, a number of hedge funds that hold Greek debt are even considering suing the Greek government in the European Court of Human Rights – yes, you read that right – on the grounds, apparently, that if Greece changes the terms of its bonds, this could be viewed a violation of property rights, and property rights are a human right in Europe. Amazingly, legal experts believe that they may have a case. But even if they don’t, with a number of hedge fund executives warning that they intend to hang onto their Greek debt and refuse to sign up to any deal, it looks almost inevitable that messy legal battles with the refuseniks will ensue, as has occurred in numerous previous sovereign debt restructuring processes.
But even cutting through all of this, reaching a deal on Greek PSI does not solve the fundamental problems plaguing the southern European country – or indeed the eurozone. It may enable Greece to receive its latest €130 billion bailout loan from the EU and the IMF, which would enable it to meet its €14.43 billion in debt repayments, due on March 20. But this is only the first of a number of large debt repayment obligations that Greece has to meet this year (see chart, courtesy of the IIF):
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More fundamentally, as JPMorgan’s Michael Cembalest pointed out in a recent note, even after the debt reductions under the new deal, Greece’s debt-to-GDP ratio would still be well above 100% - a level likely to be seen as unsustainable. And, given the harsh programme of austerity that it will have to commit to in order to receive more funding, this deficit is only likely to grow as the recession deepens.
Consequently, Ben May of Capital Economics believes that a deal would only be postponing the inevitable – a Greek exit from the euro.
| “Sooner or later we expect Greece to conclude that the conditions attached to the bail-out deal are simply too onerous and that its best option may be to terminate any rescue package, carry out another debt restructuring deal and abandon the single currency. Indeed, with GDP now 13% below its peak and falling fast, we think that Greece may leave the euro-zone by the end of this year. “ |