The official sector – which includes the IMF, the EU and the ECB – will have to accept haircuts on the debt owed to it by Greece, just like the private sector had to accept them, David Marsh, chairman and co-founder of independent financial think-tank Official Monetary and Financial Institutions Forum (OMFIF) told Emerging Markets.
Last year, Greece exchanged E200 billion of sovereign bonds for new, longer-term paper at a discount, in a restructuring process that involved only the private sector creditors, known as private sector involvement (PSI).
Analysts have warned that official sector involvement (OSI) is inevitable if the country, which had overall debt of around E300 billion at the end of last year, or around 156% of GDP, is to be able to return to the markets.
“Two-thirds of outstanding Greek debt is now in the official sector because the private sector, understandably, has retreated. We had PSI in 2012, in 2014 there will be OSI,” said Marsh, who is the author of the book Europe’s Deadlock: How the Euro Crisis Could Be Solved — And Why It Won’t Happen.
He warned that countries like Italy and Portugal, which are struggling with big debts themselves, would have to take part in the haircut on Greek debt held by European institutions.
“I don’t think it’s going to be a pretty sight, I don’t think that anybody can help what will happen. All that we can tell is that there will have to be some elements of write-off, whether it is through the ‘pretend and extend’ way of doing business, stretching out the loans.
“It will mean that the net present value of the loans on the books of the official institutions will have to be stretched out and the net present value will fall, and that to me is a write-off. I don’t know how big it will be, it may be relatively small, but it will be a write-off,” he said.
But this will not lead to the break-up of the eurozone, Marsh added, because “the will to keep it together is very, very large”. The monetary union is likely to “stumble on for a while” and may break down eventually, but “that may be in 10 years,” he said.
However, Marsh noted that after the Cyprus bail-in of bank depositors in March it became clear that “the euro in its old, pure, pristine form has died”.
“There was supposed to be self-regulation and also it was supposed to be a euro without exchange controls and without government manipulation. Well, we’ve kissed goodbye to that euro,” he said.
Since its debt crisis erupted in 2010, Greece underwent a painful readjustment process, which sent unemployment soaring and living standards plummeting. This has affected the country long term, and it would be better off outside the eurozone, Marsh said.
“I think they do need a much more competitive currency and they do need a large amount of debt relief. I don’t see how those things are compatible with them staying in the euro over a long period of time.”