ANALYSIS: Greek creditors divided
Changing Greek debt dynamics explains why negotiations are at an impasse
French PM Francois Baroin and Greek finance minister Evangelos Venizelos at a Eurogroup meeting in Brussels on Tuesday (Reuters)
Negotiations between Greece and its creditors to reduce its debts have developed into an impasse because the nature of the creditors has changed since the scheme to involve private sector investors on a voluntary basis was first mooted nearly a year ago.
Back then private sector bondholders made up the majority of Greece’s €350bn debts. However, as loans from the original €110bn bailout package have been deployed, principally to pay back maturing bonds, the IMF and European Union countries have built sizeable stakes.
Sovereign restructuring experts warned about the implications of a delay last year. Max Ziff, managing director at Houlihan Lokey, told IFR: “The more of such super-senior EU and IMF debt there is, the more regular debt traded in the bond markets starts to look like mezzanine finance.”
The private sector’s position has been further weakened by the European Central Bank’s actions. It has acquired Greek bonds in the secondary market with an estimated face value of €40bn since launching this purchase programme in June 2010. These have mainly been sold by private sector investors.
The ECB regards its holdings as equal to those of fellow Troika members the IMF and EU. As such these are considered official sector debts rather than private sector ones. That means these bodies together hold the largest portion of Greece’s debt stock, with €144bn, or 42% of the total.
IIF’s dilemma
The Institute of International Finance, which is leading negotiations with Greece, claims to represent a group of 30 banks and other bondholders with 60% of the remaining €206bn not in official hands. However, that equates to €124bn, or just 34% of the total, less than the Troika’s stake.
Ironically the last two tranches of the original bailout programme released since the private sector negotiations started last July have switched the balance of power into the official sector’s hands. These amounted to €20bn. Most of this has gone on repaying maturing bonds, further reducing the private sector’s stake.
The IIF group’s position is further weakened, because it does not speak for 40% of the private sector holdings. That €82bn represents 23% of Greece’s total debt.
This portion, made up of a range of investment institutions, could play an important role in the coming weeks as it is unclear what proportion, if any, could be persuaded to exchange their bonds for new paper. A lot will depend on which bonds they hold and what price they paid for them.
What is clear is that while the official sector does now have the largest overall holding, it does not have a majority, unless the ECB buys up more Greek bonds in the secondary market, with a face value of €31bn. This does not appear to be the case at the moment.
No wonder then that the private sector negotiators are calling for the ECB’s stakes to be excluded from special protection under any restructuring. If the ECB’s bonds were considered “private” then the official sector’s portion of Greek debt would drop to 29%.
And that would mean the private sector would then theoretically hold the upper hand, with the IIF group and the ECB holding together making up €164bn, or 47% of the total.
“What the eventual nature and tone of this exercise will be is difficult to predict, but it is not clear that the EU/IMF package will have made the task much easier”
However, Greece looks unlikely to want to side with private sector creditors as its immediate cashflow comes from the official sector, in the form of IMF and EU loans. And the largest private sector holders are the Greek banks with around €45bn and they are effectively relying on the ECB for short-term funding.
The delay in implementing the deal has played into the hands of the official sector and away from the private sector. A year ago a sovereign restructuring expert told IFR: “It would be better to do something now than concede effective control of the process to those creditors in the official sector.”
Sebastian Espinosa, managing director at White Oak Advisory, agreed that this would affect the dynamics of Greece’s restructuring.
“What the eventual nature and tone of this exercise will be is difficult to predict, but it is not clear that the EU/IMF package will have made the task much easier,” he said. White Oak has advised the Seychelles among others on debt restructurings.
