The difference between a (hair)cut taken on Greek bonds held by investors and a cut to actual Greek debt — illustrated by UBS:
In short, as shown in the above chart, a 50% haircut effectively equates to a 22% reduction in existing debt once the [Greek] banks have been recapitalised. This is far from enough. Or, to put it another way, to achieve an actual 50% reduction in the debt, Greece would need to implement a 100% haircut, i.e. repudiate its debt totally.
Striking result, very simple reality.
What the UBS economists have done is assume that both the ECB’s holdings of bonds and the official eurozone and IMF loans will avoid being written down. This will put all the load on the private holders despite the eurozone loans supposedly ranking equal with them. (Ask the Finnish government how likely that equal ranking will be…)
UBS also assume that the Greek government will recapitalise its own banks to cover their own losses on its bonds, thus using up resources that could have gone to pay off its bondholders. All these assumptions are now well into the mainstream by now, of course.
So, UBS want “super PSI”, or a restructuring that completely avoids principal write-downs, in favour of reducing the coupons Greece pays on its restructured debt as much as possible. As part of this, they’d also like to suggest reducing the discount rate applied to this cut in order to prop the future cash-flow banks could expect to get from the new bonds in their lifetime – quite favourable accounting treatment then.
It’s a classic resurrection of the Brady bond solution to the Latin American debt crises of the 1980s — which is why it’s just not enough. By the time the original Brady plan to extend debt maturities came around, banks had already been setting aside cash for the impaired debt for seven years.
But the UBS proposal is still useful for showing the very real damage that the official creditors have done to Greece’s debt sustainability. That’s the reason why every Greek debt restructuring plans is madly complex: they all have to skirt round this inconvenient truth.
Although in terms of old-style complex debt restructuring, kudos to UBS for digging up this bit of history (on a favourite FT Alphaville subject, sovereign equity):
Debt-to-equity swap: For instance, the 1889 Peruvian debt settlement involved the cancellation of US$30 million of outstanding debt and US$23 million in interest arrears in return for the right to operate the rail network for 66 years, two million tons of guano and the concession for the steamboats on lake Titicaca.
For now, Greece is only offering figurative crap to its creditors…
The Guano Age in Peru – History Today