Greece could still start restructuring its sovereign debt using coercive measures before June 2013, even if the indebted country secures fresh bailout funding to tide it over to that date.
“The proposed new loans still assume that Greece will return to the market by 2014. However, that is unlikely,” said one sovereign restructuring expert who spoke to IFR.
A banner is seen in front of the parliament during a rally against austerity economic measures and corruption in Athens on Monday
REUTERS/Yiorgos Karahalis
Throughout the current crisis the European Union has insisted that no restructuring of Greece’s debt will be carried out before June 2013.
That was the point by which all the original €110bn monies pledged to Greece by the EU and IMF, with backing from the European Central Bank, would have been disbursed.
It was also the date at which the European Stability Mechanism was due to be up and running. This fund, backed by the Eurozone members, could buy primary bonds to prop up ailing countries.
However, at that stage Greece’s estimated €370bn debt could be as much as 170% of its GDP, with half in the hands of official creditors, such as the IMF, ECB and EU countries and institutions.
Another financial adviser said the planned second bailout could complicate any eventual restructuring too, because of the envisaged involvement of the European Financial Stability Facility.
At the time of Greece’s original bailout agreement in June 2010 this had yet to be set up and the majority of monies were pledged bilaterally by European Union states, as well as the IMF. Now the €440bn EFSF has been earmarked to provide the bulk of the next wave.
Traditionally the IMF’s debt has been considered immune from restructuring. And originally the EFSF’s successor, the ESM, had tried to secure preferred creditor status too.
However, on Monday the chairman of the Eurogroup of Eurozone finance ministers, Jean-Claude Juncker said this would no longer be the case for countries already in support programmes. “This will make it easier for them to come back to the market,” he added.
At the moment Greece’s loans made direct with EU members are not considered senior. Neither would EFSF lending be ranked above normal private creditors, nor would the bonds bought by the ECB in the secondary market.
However, the providers of all these types of loans would be reluctant to see their stakes given a haircut. “The question of where the EFSF and bilateral lenders rank in the event of a restructuring will surely come to the fore,” said the second advisory source.
If all these parties were kept full, like the IMF, then that would mean non-official creditors, accounting for only half the debt stock, would have to bear the main burden of any restructuring.
At that stage with Greece effectively needing to reduce its debt by two thirds to below 60%, if it were to meet the Maastricht criteria of euro membership, they could be wiped out entirely.
An alternative would be to reduce as well the value of official sector debt, perhaps also including the previously untouchable IMF. That could create serious ructions. Apparently the Japanese and the US have been protesting about this possibility on G7 conference calls.
Another option would be to extend the official sector debt for perhaps upwards of 20 years. That might effectively rule out Greece returning to the bond markets in the medium term, which would also be the case under the other routes in any case.
“All the options are bad,” said the first source, adding that this could lead Greece to choose to default before June 2013. All ultimately depends on the domestic political situation. “The politics is unpredictable and could change very quickly.”
These starker options make the current talk about Greece carrying out privatisations and persuading bondholders to roll over maturing debt in the next two years look almost quaint.
Christopher Spink