On 3/10/12, Marv Gandall <marvgand at gmail.com> wrote:
> Greece’s private creditors are the lucky ones
> By Nouriel Roubini
> Financial Times
> March 7, 2012
>
> A myth is developing that private creditors have accepted significant losses
> in the restructuring of Greece’s debt; while the official sector gets off
> scot free. International Monetary Fund claims have traditional seniority,
> but bonds held by the European Central Bank and other eurozone central banks
> are also escaping a haircut, as are loans from the eurozone’s rescue funds
> with the same legal status as private claims. So, the argument runs, private
> claims have been “subordinated” to official ones in a breach of accepted
> legal practice.
>
> The reality is that private creditors got a very sweet deal while most
> actual and future losses have been transferred to the official creditors.
>
> Even after private sector involvement, Greece’s public debt will be
> unsustainable at close to 140 per cent of gross domestic product: at best,
> it will fall to 120 per cent by 2020 and could rise as high as 160 per cent
> of GDP. Why? A “haircut” of €110bn on privately held bonds is matched by an
> increase of €130bn in the debt Greece owes to official creditors.
>
> A significant part of this increase in Greece’s official debt goes to bail
> out private creditors: €30bn for upfront cash sweeteners on the new bonds
> that effectively guarantee much of their face value. Any future further
> haircuts to make Greek debt sustainable will therefore fall
> disproportionately on the growing claims of the official sector. Loans of at
> least €25bn from the European Financial Stability Facility to the Greek
> government will go towards recapitalising banks in a scheme that will keep
> those banks in private hands and allow shareholders to buy back any public
> capital injection with sweetly priced warrants.
>
> The new bonds will also be subject to English law, where the old bonds fell
> under Greek jurisdiction. So if Greece were to leave the eurozone, it could
> no longer pass legislation to convert euro-denominated debt into new drachma
> debt. This is an amazing sweetener for creditors.
>
> Moreover, the official sector began restructuring its claims (both the IMF
> ones and those with equal status to private ones) well before private sector
> creditors. Maturities were lengthened – effectively a debt restructuring –
> and the interest rate on those loans reduced, repeatedly.
>
> This was despite the fact that all official loans should have been senior to
> the private ones, as they were all extended after the crisis struck; an
> attempt to resolve it rather than its cause. Historically, bilateral
> official (Paris Club) claims are treated as equivalent to private ones
> (London Club) only because such debt builds up for decades, as governments
> lend money to former colonies or allies for political reasons. But all
> official lending in the eurozone began after the crisis and should have been
> senior to private claims. Any senior creditor that extends new financing to
> a distressed debtor should be given seniority; this is the principle of
> “debtor in possession” financing in corporate debt restructuring.
>
> Moreover, until PSI occurred, for the past two years official loans by the
> troika of international lenders allowed Greece’s private creditors to exit
> their maturing claims on time and in full (or with a modest discount for the
> bonds purchased at high prices by the ECB). PSI came too little, too late.
>
> Also, while the eurosystem will receive, in the debt exchange, new Greek
> bonds valued at par, all the accounting profits from this scheme (plus the
> coupon on the bonds) will be transferred to governments, who have the option
> of passing these gains to Greece. The result is a haircut of about 30 per
> cent on these official sector claims. And if the ECB’s Greek bonds are
> passed – with no loss – to the EFSF, the latter will end up taking the
> losses for the difference between the bonds’ current low market price and
> the price at which the ECB bought them.
>
> In conclusion, the idea that Greece’s debt restructuring is all PSI and
> haircuts, with no official sector involvement, is a myth. OSI started well
> before PSI; the PSI deal has substantial sweeteners; and with three quarters
> of Greek debt in the hands of official creditors by 2014, Greece’s public
> debt will be almost entirely socialised. Official creditors will be left to
> suffer most of the huge additional losses that remain likely on Greece’s
> still unsustainable debt in future. Moreover, the second official sector
> rescue of Greece will not be the last. Greece will not regain market access
> for at least another decade; so its fiscal and current account deficits will
> have to be financed with additional official resources for the foreseeable
> future.
>
> Greece’s private creditors should stop complaining and accept the deal
> offered to them. They will take some losses, but they are limited and, on a
> mark-to-market basis, the debt exchange offers them a potential capital
> gain. Indeed, the fact that the new bonds are expected to be worth more than
> the old suggests that this PSI exercise has further transferred losses to
> Greece’s official creditors.
>
> The reality is that most of the gains in good times – and until the PSI –
> were privatised while most of the losses have been now socialised. Taxpayers
> of Greece’s official creditors, not private bondholders, will end up paying
> for most of the losses deriving from Greece’s past, current and future
> insolvency.
>
> The writer is chairman of Roubini Global Economics and professor at the
> Stern School of Business, NYU
>
>
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