Restructuring, roll-over, moratorium

In the next few weeks the ECB/EU/IMF Troika will deliver its report on the implementation progress and compliance of Greece. On the basis of this report the EU and the IMF will decide whether to release the jumbo instalment of 31.5 billion euros that was promised after the successful completion of the PSI. The Greek government on the other hand, wishes on the basis of this report, to get an extension or some easing on the implementation schedule. The aim is to increase its chances of survival given the precarious state of the government coalition and the presumed social reaction to the structural changes. Any easing could come from the rollover or restructuring of the Greek debt. Andreas Koutras examines the options available given the current state of the Greek debt and its schedule.

The full article of A. Koutras:

In the next few weeks Troika will deliver its report on the implementation progress and compliance of Greece. On the basis of this report the EU and the IMF will decide whether to release the jumbo instalment of 31.5 billion euros that was promised after the successful completion of the PSI. The Greek government on the other hand, wishes on the basis of this report, to get an extension or some easing on the implementation schedule. The aim is to increase its chances of survival given the precarious state of the government coalition and the presumed social reaction to the structural changes.

Let us map the debt situation after the PSI restructuring to see what can be done. The Greek debt has been split into basically three classes.

1)      Post PSI bonds. The forced exchange of around 200 billion Greek law bonds created 65 billion (nominal) of new English law bonds. Currently the coupon on these bonds is 2% and the cost of servicing them is only 1.3billion a year. Greece no longer has the ability to unilaterally restructure these bonds as they are under English law. The only other option is to declare a moratorium on the payments to force a second restructuring, which is obviously an event of default. This solution however, entails more risk than benefits. These bonds currently trade at 24% of par and the threat of non-payment is not as credible. Moreover, Greece would get entangled in legal fights that would severely damage whatever international reputation it has left and would also risk being totally excluded from any sort of credit.

2)      Bonds held with the ECB. The unreasonable and rather poorly justified ECB decision not to take part in the PSI resulted in some 54 billion in legacy bonds. The ECB bought these bonds in the secondary market like every other investor. ECB’s argument was that they bought them for monetary purposes and taking part in the PSI would be considered as financing the Greek state. They thus claim that they are in some way preferred creditor to Greece. However, the ECB cannot be a creditor to any country as this is explicitly prohibited by the Maastricht treaty. From this it follows that they are investors. In fact a rather strange class of investors, a “preferred investor”. This classification does not exist. All investors are the same no matter their motives in buying the bonds. In addition, the ECB claimed that the purchases fulfil a monetary purpose. This is clearly not true since price stability which is the main mandate of the ECB has been observed all this time. The financial stability argument although stronger fail on account that the ECB is not responsible for the financial stability or supervision of the market but has only an advisory role (TFEU 127(5),(6)) The excuse that it would cause huge losses to the capital base of the ECB again does not stand up to scrutiny. We have seen recently the initiation of the new unlimited purchases program, the Outright Monetary Transactions (OMT), which would accept unlimited losses.

In any case, there are 8 and 10 billion of these bonds maturing in 2013 and 2014. Undoubtedly, a rollover would significantly ease the financing needs of Greece for these two years. The ECB refuses to roll them over as this for sure would be seen as financing the Greek state. There is however, a way round this technicality. Greece could issue short term bills of up to 12months and use the money to redeem the ECB held bonds. The money would come from Greek banks and/or others (like ESM) that would buy these bills and use them as collateral with the ECB’s repo operations thus obtaining the necessary funds. The big stumbling point in this scheme is that Greek banks are effectively bankrupt without the recapitalization money and the ECB refuses to accept either the Greek banks or Greek assets unless there is a favourite report by Troika. Thus we go back to square one. It is for this reason that the release of the 31.5 billion is so crucial for Greece. Out of the31.5 billion 25billion are allocated for the recapitalisation of the Greek banks. It would allow Greece to demand and possibly implement the rollover of 18 billion and make the Greek banks creditworthy. In other words, it is not just money for salaries and pensions but has wider positive repercussions.

3)      Bilateral loans and IMF loans. This is by far the largest class of Greek debt. From the first bailout package of 110 billion so far 73 billion have been released. The IMF has 20 billion while the EU state 53 billion. Greece is obliged under the terms of the financing agreement to repay 1.7 and 7.4 billion to the IMF in 2013 and 2014, respectively. These IMF loans are harder to roll over as the purpose of the IMF is not to keep on financing Greece and in any case it is well publicised that the IMF wants to implement an exit strategy as fast as possible. However, the same procedure with short term bills could be used to repay these IMF loans. Of course the downside of this is that the maturity profile of the debt is lowered but as long as the ECB can repo them the process can continue for a couple of years till the Greek state is able to access the capital markets.

The non-IMF bilateral loans are easier to restructure. Even though they are under English law, their bilateral nature and the fact that non-payment is not an automatic event of default unless the lender acts. In other words, a delay in the interest rate payments or a grace period is feasible. Haircutting these loans may be politically unacceptable, at least currently, but changing the schedule of interest rate payments in order to give Greece a fighting chance is doable.

In conclusion, the successful and prompt release of the 31.5 billion for the right reasons and not ostensibly for political expediency would benefit Greece in many ways. Whether Greece stays in the Eurozone and manages to enter a growth phase is now in the hands of the Greeks. Europe would continue to assist for as long as it is politically convenient. Once those reasons are eclipsed, Greece would be deserted. The Greek government should proceed with all the structural reforms and deny Europe the necessary excuses to implement their exit strategy from Greece.

About A_Koutras

In Touch Capital Markets

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One Response to Restructuring, roll-over, moratorium

  1. “Greece Drinks the Hemlock” is the title of the NYT-editorial on the passing of austerity measures. I consider the following sentence as the most important one:

    “Greece cannot pay off its debts when it is shutting down its economy. It has to put people back to work”.

    And the sentence following the above I consider the most questionable one:

    “The only way forward is through more debt write-offs and more low-interest European loans, as well as by opening up restricted job markets”.

    Even if all of Greece’s debt were forgiven, it wouldn’t change much in the functioning of the Greek economy. If all restricted job markets were opened up overnight, it might change something but I would only believe it when I saw it.

    Either way, the Greek economy would continue to be an economy which does not generate enough value to justify the standard of living which Greeks justifyably desire. There simply is not enough domestic production to satisfy a greater portion of domestic demand (making horrendous imports necessary and underutilizing domestic resources) and there certainly is not enough domestic production to generate the amount of exports necessary to justify the desired imports. And with all that underutilization of resources, chronic unemployment cannot be avoided.

    Thus, I return to the ‘early promising signals’ which I have described in a previous post. A better future for Greece can be expected when the following sentiments are felt throughout Greek society:

    * an obsession with import substitution
    * an obsession with export expansion
    * an obsession with making tourism/shipping competitive
    * an obsession with private foreign investment; and, last but certainly not least:
    * an obsession with the EU Task Force to do everything possible to modernize Greece’s public administration and to make Greece a governable state

    If and when that happens, the issue of a debt write-off (which may still be necessary) will become a side issue. Creditors have already accepted the fate that existing debt must be considered – to a large extent – as ‘spilled milk’. The difference is that foreigners (creditors and, above all, investors) will be happy totransfer Fresh Money to Greece because they can have the confidence that the money is well spent.

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