IFR Comment: Don't mention a Greek debt haircut before the German election
Divyang Shah, Senior IFR Strategist
The private sector has already been bailed into the process of taking Greek debt toward a more sustainable path with the PSI last year.
Along with the debt buyback there was only a modest dent to Greek debt and the need for a more radical reduction in the Greek debt/GDP ratio remains.
With a large chunk of Greek debt now in the hands of the official sector an OSI seems a rational outcome to expect especially as another PSI is made difficult by the fact that:
1) Greece will likely want to keep investors on its side, and
2) PSI-ed bonds are under international law, making them more difficult to be restructured.
The IMF has started the ball rolling arguing in its review that Greece should have restructured its debt earlier.
While the EC and IMF might argue about whether an early restructuring would have helped Greece, the key takeaway from the IMF is that the need for a haircut to Greek debt has not gone away. In 2009 Greek debt/GDP was at 130% while in 2010 it was at 148% so to argue that a restructuring was needed in 2010 suggests that it is still required now with Greek debt/GDP at 157% at end-2012.
Germany will try and keep the debate over a further haircut or OSI under the radar as it does not want it to interfere with the September German election. The German Finance Ministry has already said that it does not see that the IMF is asking for a further haircut for Greece. Ahead of the September election there will be much political hope that the topic naturally dies.
We are likely to get a showdown between the eurozone/Germany and the IMF after the elections as the IMF believes that more (haircut) needs to be done in order to bridge a EUR4.6bn funding gap for 2014 with the IMF forecasting a funding gap of €6.5bn in 2015.
Remember that the IMF cannot continue to lend if it is not satisfied that there is secure funding for the next 12-months so the showdown could happen sooner.
Whenever the OSI happens the point is that it is needed to put Greek debt on a more sustainable footing which is a prerequisite to eventually moving Greece off the life support provided by the bailout. We remain bullish on GGBs, even if GGBs remain within the speculative part of the portfolio.
