January 11, 2012 7:28 pm
The epic of the Greek “private sector involvement” – the eurozone’s euphemism for debt restructuring – has still not come to an end. It is in all parties’ interest that negotiations be swiftly brought to a conclusion. But a successful deal must not merely be prompt; it must also reshape Greece’s debt enough – in return for eurozone guarantees or cash pay-outs to bondholders – that it need not be reopened again.
The Financial Times has long called for a sweeping Brady-style debt exchange to capture the huge market discount on Athens’ sovereign debt for the benefit of Greek and European taxpayers. The main obstacle to this has been Europeans’ stubborn unwillingness to put up the money to restructure the debt once and for all and their largely legitimate distrust of Athens, which explains part, but only part, of this unwillingness.
The eurozone has come round to the merit of restructuring even as it clings to the contradictory fiction of a “voluntary” debt swap, referred to again by German chancellor Angela Merkel this week. It should throw that concern to the wind and push for a deal that cuts the burden as much as possible. Greek bonds being governed by Greek law, Athens can raise its bargaining power by adding collective action clauses to the debt.
There is no need to feel sorry for bondholders. The net present value haircuts being bandied around – of 55 or 60 per cent – are misleading, as they compare new claims discounted for default risk with old claims valued at par. Comparing like for like, some creditors – certainly those who bought bonds at low prices – will gain: Greek debt trades at 75–80 per cent discounts at all maturities above one year.
While pushing for the best possible deal, the eurozone should work to minimise the impact elsewhere. The Greek banking system will fall deep into the red with a writedown and will have to be recapitalised. This is better done through forced debt-for-equity swaps and outright foreign takeovers than with more injections of public funds. The European Central Bank’s holdings of Greek bonds should be taken off its hands at their purchase price by the eurozone rescue fund.
Most crucial is that the restructuring act as firewall, not a source of contagion. Properly done, it will make it easier for Greece to stay in the eurozone. But it must also be seen as a one-off event, lest it fuels expectations of similar exercises in other troubled sovereigns. The eurozone’s many changes of heart over PSI have increased this risk. A decisive amputation is now better than death by a thousand cuts.
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