What next after Greek deal?
The most important parts of the second package to rescue Greece, as was agreed on 20 February in Brussels by the Eurogroup, are the Private Sector Involvement (PSI) initiative to cut the nominal value of sovereign Greek debt by 53.5%, and the new soft-loan package of €130 billion, to be provided to Athens over the programme period by the other 16 Eurozone governments and the International Monetary Fund (IMF).
The end purpose of both those huge financial exercises is to reduce Greek debt to the manageable level of 120.5% of GNP by the year 2020 – all the fine-tuning of the agreement that took place during the evening and late night of 20 February was needed to arrive at this level of sovereign debt after eight years.
The IMF insisted on this, because the fund cannot participate in the financing of a country if its overall debt is not sustainable and a debt is manageable only if the ratio to income is 120% or lower. Let’s take one detail at a time.
The PSI
In the early hours of the morning of 21 February, the PSI agreement was ready, providing a 53.5% ‘haircut’ in the nominal value of Greek bonds held by the private sector, mainly European banks. This part of the Greek debt is estimated as being around €206bn – with a 53.5% haircut, it will be reduced by €107bn to €99bn.
The reduction will take place via an exchange of the old bonds for new with a nominal value of 31.5% of the old. These will be new Greek bonds but will curry a guarantee from the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).
Another tranche of the old bonds, amounting to 15% of their face value, will be exchanged for short term EFSF/ESM debt paper, which is as good as cash. For the rest, 53.5% of the nominal value of the old Greek bonds will be written off by lenders on their balance sheets, reducing their profits or their capital by similar amounts.
The International Institute of Finance (IIF), which represented the lenders throughout the past three negotiations sessions, estimated on 20 February that there will be sufficient willing participation by banks in this exchange in order to make the Greek debt sustainable.
In case the participation exceeds the 51% benchmark in all the 70 Greek bonds held by investors around the globe, then the Greek government will introduce legislation (COC) to extend the swap to all bond holders, in the same way that a corporate general assembly imposes the will of the majority on the rest of the shareholders.
In reality, Athens will organise 70 separate general assemblies of the holders for each of the bonds. The new bonds that will replace 31.5% of the face value of the old ones will have maturities of up to 30 years. Interest rates will be set at 3.66% for the 30-year bonds and 2.63% for the 20-years.
€130bn of soft loans
The Eurogroup statement issued early on 21 February reads: "The Eurogroup confirms that Eurozone member states stand ready to provide, through the EFSF and with the expectation that the IMF will make a significant contribution,additional official programme of up to €130bn until 2014."
The Eurogroup statement issued early on 21 February reads: "The Eurogroup confirms that Eurozone member states stand ready to provide, through the EFSF and with the expectation that the IMF will make a significant contribution,additional official programme of up to €130bn until 2014."
This is the second soft-loans package provided for Athens by its peers in the rest of the Eurozone. The statement adds: “It is understood that the disbursements for the PSI operation and the final decision to approve the guarantees for the second programme are subject to a successful PSI operation and confirmation, by the Eurogroup on the basis of an assessment by the Troika, of the legal implementation by Greece of the agreed prior actions.
The official sector will decide on the precise amount of financial assistance to be provided in the context of the second Greek programme in early March, once the results of PSI are known and the prior actions have been implemented. We reiterate our commitment to provide adequate support to Greece during the life of the programme and beyond until it has regained market access, provided that Greece fully complies with the requirements and objectives of the adjustment programme.”
In short, almost half of the €130bn package will be used over the next few weeks to finance the PSI operation and actually transform a Greek debt owed mainly to the private sector into a mainly government to government debt. After the PSI operation is over and the Greek banks are also refinanced from this same line of credit, almost half of it will be left.
This will be used to cover the financial needs of Greece during the programme period until the end of 2014 and, in any case, until the country is able to refinance itself from the capital market – until Greece can stand once more its own ‘financial feet’.
Is it for real?
Of course all that are two exercises designed on paper by EU, IMF, IIF and Greek experts – the reality will probably be very different, but for now Greece is at least avoiding disorderly bankruptcy, and hopes that real growth comes soon.
Of course all that are two exercises designed on paper by EU, IMF, IIF and Greek experts – the reality will probably be very different, but for now Greece is at least avoiding disorderly bankruptcy, and hopes that real growth comes soon.
The key to a successful outcome of all these paper exercises for Greece and the Eurozone is the country’s political environment and its ability to overcome its present nightmare – Greece has huge growth potential, and there are pending investment opportunities in key sectors such as tourism, transport and raw materials.
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