In many ways the
Greek government managed to deliver in its promises. The 3rd in line
MOU was voted with 153 out 300 MPs and the budget was passed with even greater
majority. Now all that remains is to see the resolve of the coalition to
implement the law and save Greece from exiting the Eurozone. Europe must now
stop playing games on the back of Greece. It is increasingly worrisome that
Europe hits the “Greece crisis” button every time there is danger in Spain or
other European countries. It seems that Greece is being used as a decoy in the
war to deflect attention from the more significant problems of Spain and Italy.
The so called sustainability of debt analysis is just a load of gobbledygook.
None of the forecast or scenario analysis that was done materialized. In fact,
most analysts and even policy makers knew that the PSI restructuring was not
done to make the Greek debt serviceable. In any case, it was done and now we
are back were we started. So what next? Another haircut to the post-PSI bonds?
An OSI restructuring? A “silent” rollover of the debt? Here we look at the
options.
Increasingly we
see articles and studies on the unsustainability of the Greek debt and there
are many calls apparently both from the IMF and other policy makers on
restructuring the official sector loans. One must be very clear on the level of
debt that Greece can sustain. Many report that a figure of more than 160% or
180% is unsustainable. This is not true. Sustainability is not just a function
of dividing the nominal debt by the GDP number. It also depends on the maturity
profile and of interest rate burden. As it stands most of the Greek debt
matures from 2022 up to 2042. There are some left overs (ECB holdings and IMF
loans) but the bulk is 10y away or later. Currently Greece is paying an average
of 3-4% on this debt. In order to help Greece it would be better to give a few
years grace period on interest rate payment and roll over the ECB rather than
instigate a haircut on the OSI.
Another idea that has gained some momentum is
to buy back the already restructured Greek bonds. i.e. the post PSI bonds that
currently are trading at around 25% of their nominal.
Back in January
and February of 2012 we presented an alternative to the PSI restructuring
offer. The idea was published by GreekEconomistsforReform
and was also presented in an LSE
Debate, AndreasKoutras.
It was also send to main policy makers in Europe and in Greece with very
interesting responses at the time.
The main idea
was to include the option of selling back the Greek debt to the Greek
government at 30% after buying back the ECB holdings at cost (54Billion bought
at around 75%). The main argument was that after taking out the main free-rider
(The ECB) at cost, investors would have no incentive to hold out and would
prefer to receive 30% (or thereabout) cash in hand rather than redemption in
30y (new PSI bonds). This would also exclude the danger of another
restructuring down the road.
Our calculations
showed that by taking the ECB out at around 75% would cost 40billion and buying
back 90% of the rest would result in a debt to GDP of around 115% from day one,
even after accounting for the recapitalization of the Greek banks. The plan was
send to many policy makers in Europe who politely answered that “the PSI was
the sole responsibility of the Greek government and the European commission had
no saying in it”!! Others were tacitly positive but powerless to react to the
PSI momentum.
The truth is
that the plan to buy the debt back had no chance of success for two reasons.
First, the wheels of Europe and of their bureaucrats were dancing in the PSI
tune and had no interest in hearing anything else. Second, the plan required
more money upfront as the buying had to be completed in 12-18months. Perhaps a
third reason was the real intention of the PSI restructuring. It was never
about reducing the Greek Debt to GDP but about punishing the markets while at
the same time immunizing the threat of Greece. From this point of view the PSI
succeeded. A financial default currently would have no direct impact in the
financial markets. The danger is now political and not financial.
In any case, the
sell-back plan never happened and we are now 8 months after the so called
successful PSI wondering if a buy-back of the post PSI bonds could help reduce
the burden for Greece. It is perhaps for this reason that the head of the IIF
Mr Dalara is visiting Greece. Let us look at the numbers.
There are about
65billion of post PSI bonds that are currently trading at around 25% of
nominal. A naïve calculation done usually by politicians is that with
16.25billion (25%*65) Greece can buy the bonds back and destroy them resulting
in a 48.75billion reduction of debt. This is a sizeable reduction. There are
however some technical problems with this strategy. First it cannot be
performed in the open market. Namely, Greece or the EFSF cannot go in the
market and start buying these bonds. The daily liquidity is barely 100million.
Attempting to buy bulk would push the price up and would diminish the benefit.
The market would know weeks in advance of the intention as the EFSF or ESM
would have to raise the funds to buy the Greek bonds and it would reprice
upwards the bonds accordingly. The only other option is for Greece to make a proper
buyback offer to the bondholders at a higher price (say around 40-50% or more)
contingent on a certain threshold amount being satisfied. This, together with
political pressure on the European banks that hold the Greek debt might yield
some results. We do not know how much of the Greek post PSI debt is still in
the hands of European banks amenable to gentle pressure from Schauble but
anecdotal evidence point to buyers from the US the past few months and not
Europeans. In other words, much of the post PSI may be in non-European banks.
By far however,
the biggest issue is the fact that these bonds are rather safe for investors to
hold. They are under English law and apparently rank Pari Passu with the rest
of Greek indebtness. This means that the threat of non-payment by Greece is not
very credible. Greece can no longer unilaterally change the bond terms like it
did with the Greek law bonds. Imposing a moratorium on payments would mean
legal challenges across the world, something that Greece and the EU might want
to avoid, especially after the recent rulings on US courts against Argentina
and on English courts (Collective Action clauses interpretation).
In addition,
servicing these bonds that have a 2% coupon only burdens Greece by 1.3billion a
year. This is a rather small amount of cashflow savings when one sees the
dangers that it entails.
Thus the only
other option is the Official sector holding.
ECB holdings
There are few
ways in which the Official sector and in particular the ECB can help Greece alleviate
some of the debt burden. One that has been ruled out completely is to haircut
the bonds in accordance to the PSI. Another idea is to exchange the ECB
holdings with new bonds of longer maturity. This too has been deemed monetary
financing, and thus ruled out. Selling them back to Greece at cost is another
option that would require finding around 30billion with a gain of only 10.
However, there is one option that can be done without violating the Treaties
and is being done all the time.
Solution: Allow
Greece to issue T-bills to pay for the 18billion of redemptions in 2013 and
2014. Greece simply issues the T-bills that are bought by Greek or other banks
which in turn they put them as collateral with the ECB (or ELA) to obtain the
funding. In this way, the ECB is getting repaid and the debt can be rolled over
for few more years till Greece can pay it.
For this to
happen the ECB should allow the extension of the T-bill limit. In doing so it
would give Greece the necessary breathing space to effect reforms on a more
sustainable basis.
NPV restructuring the Official Sector
The only other
option that is politically edible is to restructure the OSI loans by giving
Greece a grace period of 5Y on the interest payments. Haircutting the principal
amount is not something that can be done now so the best option is to
capitalize the interest and make it payable in 2042. This would give enough
leeway to Greece to ease the recessionary effects of rapid cuts.
Conclusion
If Europe wants
to help Greece they must release the 31.5billion in order for the Greek banks
to be recapitalized and give the economy a fighting chance. If Europe is
sincere in helping Greece overcoming their problems they should also give a
grace period on interest rate payments conditional on reforms and targets to be
met. That would be the best incentive for Greece.
