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Monday, 18 November 2013

Restructuring the Greek debt

Heraclitus writes:

It was the best of times, it was the worst of times...'  That pretty much captures the composite picture of the Greek debt restructuring, as it emerged from the PEFM seminar on November 11th. Jeromin Zettelmeyer of the EBRD presented; Jens Bastian of ELIAMEP (formerly on the EU Greek Task Force) discussed; and Russell Kincaid (St Antony's College, formerly IMF) guided the animated debate that followed.

Maybe you needed a shot of Mediterranean coffee to keep on top of all the issues: the contested valuations; the debt projections; the inter-creditor fights... But Jeromin Zettelmeyer shed fresh analytic light on all these facets, and in so doing he laid the foundations for some rather important new findings about the Greek debt restructuring and its implications for the future.

View presentation

First of all, private creditors exaggerated the economic losses they had suffered, but nonetheless this really was one of the deepest 'haircuts' for bondholders in modern times, at least for claims on a country that was not in the very low-income category.
The average loss suffered by bondholders was, according to Jeromin, not quite as steep (per unit of debt) as in Argentina. On the other hand, the scale of the total debt subjected to reduction was much larger. As a result the debt relief benefit to Greece was on the order of 50% of GDP. This was a huge scale of debt relief by historical standards.

The approach to this restructuring was termed 'voluntary'. But as the process went down to the wire, some ambiguity was evident. There were positive inducements, but in the closing days of the deal, bondholders seem to have been placed in some doubt about their fate if the exchange did not go ahead.

Troublingly, however, the restructuring (and a subsequent debt buyback) have not laid to rest doubts about the Greek debt outlook. The IMF has recently been pressing the need for further financial easement - this time affecting official claims (although not IMF claims!) on Greece.

Today's still worrisome outlook naturally triggered questions at the seminar about weaknesses in the process that was adopted for Greece, and lessons for the future. Some deep reservations were expressed about the strategy and its execution:

-- concerns about systemic risk, and then disputes among creditors, caused a long delay between the recognition that there was a sustainability problem and the actual execution of a debt reduction package;

-- this long delay allowed a 'migration' of private sector claims to public sector portfolios on an unprecedented scale, seriously limiting the scope of (and thus the debt relief from) the restructuring, and ultimately raising questions about the viability of these official claims;

-- the process was designed to limit contagion, but there were serious effects on other euro area sovereigns; and there were also - perhaps unavoidably - very serious spillovers indeed from Greece to Cyprus, whose exposure to Greek risks ended up contributing to a systemic financial crisis on the island, and the imposition of capital controls within the euro area; and

-- eventually, 'hold-out' creditors - despite some ambiguous signals - were treated rather generously, and this made it much harder to pursue in the future the options that were adopted in Greece.

A worrying undercurrent that emerged in the discussion was the risk ahead of an unseemly fight for preferred creditor status among official creditors, in which the case of Greece may set possible precedents. Unless and until this concern is resolved, the burden of official debt hanging over Greece (the sword of Damocles, one might say) risks deterring future market inflows. 

So the seminar began in Athens but ended with a strongly-voiced concern about the entire debt rescheduling process at it stands today. Ah well, Jeromin has a (joint) paper on that too. Instantly, Ngaire Woods and Max Watson pounced to extract the promise that Jeromin would present this general debt restructuring paper in early 2014 to a GEG-PEFM joint roundtable on what has truly become a  global governance issue.

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