Greek Debt Proposal

In summary

• Actions1. PSI’s retroactive application to the ECB’s holdings  
• Action2. Bilateral loans. Introduce a 10 year grace period and a maturity extension 
• Action3. EFSF loans. Transfer of HSFS debt to ESM. 
• Action 4. IMF loans. Partial transfer
• Action 5. We propose a change of the way Eurostat accounts for all European debt to a valuation according to the net present value and not nominal. We further propose a defeasance mechanism for 20-25% of the Greek debt. 

At the end of July 2014 the Greek national debt was in the region of 322 billion Euro. The majority of it, 82% was in the so called official sector i.e IMF loans(9%), EFSF (60%), ECB (10%), BoG and EIB (3%). Most of it was under English law (85%). The ECB holdings are under Greek law.

The basic principles of any debt restructuring are

1. The restructuring must be thorough and comprehensive. It should not leave an aftertaste of a possible recurrence to the market. 
2. The Hellenic Republic must come out of it with a rating upgrade to a minimum of BBB. In addition the long term interest rates should be within 1 % of Eurozone’s average 
3. The debt should be serviceable in accordance to the potential of the Greek economy and not to some onerous assumptions of growth or primary surpluses.

The proposal

The following actions aim to reduce the nominal value of the Greek debt by 55-58% of GDP. In other words, a reduction of 108billion to 215billion or 120% toy GDP.

Actions1. PSI’s retroactive application to the ECB’s holdings

We propose a fully retroactive haircut according to the rules of the PSI for the full ECB holdings.

The reasons the ECB did not participate in 2012 PSI are no longer valid. 
The reasons the ECB did not participate in 2012 PSI are no longer valid. 

• The ECB claimed that the purchases were part of a monetary tool but at the same time they exempted 13billion that was bought for investment reasons. 
•  The ECB cannot be a creditor of any country as this is against the treaties.  It is thus an investor and as we all know there is no preferred-investor. 
•  The ECB stopped the immunization of the SMP and declared that any further purchases would respect the Pari Passu. However, it exempted the SMP without giving any valid reason. 
•  The conduct and the way the ECB was exempted from the PSI is legally questionable. The ECB secretly exchanged the ISIN numbers few days before the PSI offering.

 A total of 56.6billion of bonds were exempted from participating. So far, 25billion have been repaid to the ECB from the aid received.

The PSI forced a 53.5% haircut on the nominal value of the Greek bonds. Greece would save approximately 30billions minus any returns. The money could be paid back to Greece with conditionality and on a 10 year horizon.

We further propose that the money should be used to fund specific growth projects in Greece. 

Action2. Bilateral loans. Introduce a 10 year grace period and a maturity extension

Under the current political but also legal framework a haircut on the nominal value of the Greek debt is unrealistic. But the extension of these loans (52.9billion) from the current maturity of 15year to 50 years is feasible.

We propose a 10 year grace period on the coupons by capitalizing them. We further propose fixing the interest rates with a stepping up interest.

Action3. EFSF loans. Transfer of HSFS debt to ESM.

EFSF loans (141.9billion) are also hard to haircut on similar reasons. The loans have a 10 year grace period and average maturity of 32.5 years.

A total of 48 billion out of the 141.9billion have been allocated for the recapitalization of the Greek banking system. We propose that this debt to be transferred to the ESM and thus be removed from the Greek debt. Of course this means a transfer of ownership of the banks to the ESM.

This measure alone would reduce the Greek debt by 26% of the current GDP.

Action 4. IMF loans

Repayment of the IMF loans starts in 2016. We propose that part of the repayments to be transferred to the ESM in order to reduce the interest which now stands at SDR+3% and alleviate some pressure on maturities.

Action 5. We propose a change of the way Eurostat accounts for all European debt to a valuation according to the net present value and not nominal. We further propose a defeasance mechanism for 20-25% of the Greek debt.

Even though the absolute level of the Greek debt is unusually high the maturity distribution and duration of it is much better than most of the other European partners. Most loans have a maturity of 15 to 30 years. For example the EFSF loans have an average maturity of 32.5years.

The accounting of the debt using the nominal value rather than the net present value distorts the true needs of the Hellenic republic. If for example, we account the net present value of a a long term discount rate of 4%, the total debt would have been less than 90% of the current GDP. A similar calculation for other European countries gives a similar or higher number.

We thus propose that Eurostat accounts for all European government debt with a net present value methodology rather than the nominal amount.

As this might take time, we propose further a defeasance mechanism to reduce the nominal value of the Greek debt by 15% of the GDP. This would involve the purchase of long term zero coupon bonds that are set against long term debt.