27.4.2010. Best Hope for Greece: Minimize the Losses

27.4.2010. Best Hope for Greece: Minimize the Losses
Published: April 25, 2010
Only a few weeks ago, the idea that Greece might restructure its debt seemed like the nuclear option. Now restructuring — a polite alternative to outright “default” — is not only thinkable, but even likely.
aliff Owen/Associated Press
George Zanias, left, of the Greek Council of Economic Advisors; the Greek finance minister George Papaconstantinou, center; and Panagiotis Roumeliotis of the International Monetary Fund.
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Debt Rising in Europe
· Times Topics: Economic Conditions and Trends | Greece
And one way or another, many economists say, bondholders are expected to bear some of the burden.
In a full-fledged, Argentina-style default, investors would lose over half their money — an option that may be too severe for Greece to contemplate seriously. But even a so-called haircut, in which creditors absorb a relatively modest reduction in the face value of Greek bonds, could have dire consequences for the euro zone and the region’s beleaguered banks, which hold most of Greece’s bonds.
The milder option would spread out Greece’s payments to creditors, who would have to accept a decline in the present value of their investments — an option that is starting to look like the best of an array of bad choices.
“Only a multiyear restructuring of the bond obligations, coupled with substantial deficit reduction, can achieve a permanent adjustment of Greece’s fiscal obligations without actually defaulting on the paper and giving all stakeholders a haircut,” Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said via e-mail on Sunday.
Mr. Weinberg has proposed converting all Greek bonds due until 2019 into a pool that would be refinanced with 25-year bonds. Assuming a 4.5 percent interest rate, this plan would cut Greek financing requirements by some 60 percent, or 140 billion euros ($187 billion), he estimated. Because 10-year Greek debt is now yielding more than 8 percent, those who have purchased Greek bonds recently would take a significant loss.
Daniel Gros, director of the Center for European Policy Studies, a research organization in Brussels, has proposed a similar plan. He favors simply extending the maturity of existing notes by five years, at the same interest rate. So, a five-year bond paying 6 percent annual interest would become a 10-year bond, still paying 6 percent interest.
Both plans would relieve Greece of the pressure of continually trying to raise money in increasingly unfriendly capital markets to refinance maturing debt. Instead, Greece could concentrate on reducing its deficit, which stands at 13.6 percent of gross domestic product, according to the latest upward revision. It would gain time to restore its economic competitiveness.
With some kind of debt rescheduling, investors would continue to collect interest, and would receive all their principal back in the end. They would have to wait longer, however, with the effect of reducing the current value of their holdings.
Such a plan might appeal to policy makers worried about the effect of default on countries like Spain and Portugal, whose finances are also troubled, and on the European banks that have just been bailed out.
For bondholders to trade in their holdings for longer-term debt, Greece and its backers would need to convince creditors that restructuring offered them the best chance to get their money back.
At the same time, among politicians, talk of default is taboo. “Any notion of restructuring is off the table for the Greek government, has never been put on the table of negotiations and has never been part of any suggestion or proposals made by the I.M.F. to Greece,” the Greek finance minister, George Papaconstantinou, said Sunday during a news conference in Washington, where he was attending a meeting of the International Monetary Fund.
Revised figures released on Thursday by Eurostat, the European Union’s statistics agency, underlined just what a deep hole Greece is in. Total government debt was 273 billion euros, or $365 billion, at the end of 2009, or 115 percent of annual gross domestic product. Interest alone could come to 97 billion euros, or $130 billion, over the next five years, Mr. Weinberg estimates.
There is no way Greece can manage that burden, he and other analysts say, without far more aid than the 30 billion euros that other European Union members have pledged. Yet political resistance is growing to even that relatively modest rescue plan.
Since Greece formally requested the European Union aid on Friday, as well as 15 billion euros from the International Monetary Fund, Chancellor Angela Merkel of Germany and Wolfgang Schäuble, finance minister, have strained to placate domestic critics by promising that the money would come only with harsh conditions attached.
But analysts argue that bondholders must share the pain. “I can’t see the Germans doing it forever without a contribution from the private sector,” Mr. Gros said.
There is a chance that, if Greece declared itself unable to make its debt repayments on schedule, some hedge funds or other creditors could go to court to try to seize Greek assets. International property seizures were once the norm.
Hans-Bernd Schäfer, an affiliate professor of law and economics at Bucerius Law School in Hamburg, doubts that many courts would support a Greek asset seizure. Military equipment, embassy buildings and other property essential to the functioning of government is exempt from claims under international law.
Still, the risk of court action by dissident investors illustrates the complexity of any restructuring.
The history of sovereign defaults, which have been commonplace in the last century, offers plenty of reasons for investor alarm. For example, owners of Argentine debt took a 67 percent haircut in 2005, economists at Commerzbank noted in a report on Friday.
The threat of such a drastic loss might be enough to persuade most investors to support a restructuring.

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