Restructuring the Parthenon, Part II | FT Alphaville

Restructuring the Parthenon, Part II

What’s Greek for junk? Because that’s where Greece’s sovereign debt is, after S&P slashed its rating by three notches to BB+/BB on Tuesday.

But that’s not the worst of it. This is. From S&P’s release:

On April 27, 2010, Standard & Poor’s Ratings Services lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to ‘BB+’ and ‘B’, respectively, from ‘BBB+’ and ‘A-2′. The outlook is negative. At the same time, we assigned a recovery rating of ’4′ to Greece’s debt issues, indicating our expectation of “average” (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The ‘AAA’ transfer and convertibility assessment is unchanged.

Well, that livens up the Greek debt restructuring debate of recent days just a tad.

If S&P is right, a few European banks might be flirting with insolvency – or at least looking forward to being bailed-out. From Willem Buiter’s note earlier on Tuesday, here’s a chart of European banks’ exposures to Greece (click to enlarge):

Buiter had warned of haircuts of 20 to 25 per cent — nothing like the recovery rates now being predicted by S&P.

On Monday, FT Alphaville noted research which said that Greek debt restructuring is not a good idea for the moment — at least until fiscal adjustment has been tried out.

And, well, trust German politicians to have suggested the opposite.

As Reuters reported on Tuesday:

Chancellor Angela Merkel’s Christian Democrats (CDU) will raise the subject of forcing investors to take a discount on Greek debt in talks with the IMF and the ECB on Wednesday, a senior party official said.

CDU budgetary spokesman Norbert Barthle said he would raise the issue of “haircuts” on Greek debt when parliamentary groups from the Bundestag lower house meet International Monetary Fund Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet in Berlin on Wednesday…

Rather oddly, Herr Barthle presented the idea as a way to punish banks which have allegedly ‘speculated’ by buying Greek bonds in recent months:

“That would mean whoever bought Greek bonds wouldn’t get 100 percent of their value but say only 80, 90 or 70 percent — it depends,” Barthle said, adding it was too early to say how much of a discount on the debt should be sought.

Oh dear. That seems a bit timid now that Greek bonds have turned into junk.

Meanwhile, Stephen Lewis of Monument Securities presented another, rather more Machiavellian argument for why German politicians might be keen on haircutting Greek sovereign debt, however. As Lewis argued (emphasis ours):

It is misleading to present the current situation as a harbinger of worldwide sovereign debt problems. It is, at heart, an existential crisis of the euro…

…German leaders, their resolve stiffened by public opinion, seem to be alone in the euro zone in their willingness to recognise practical reality. For some time now, they have entertained the prospect of a different kind of euro. Last month, Mrs Merkel was talking about mechanisms to expel existing members from the zone. More recently, Mr Schaeuble has insisted that nothing will be allowed to imperil the euro’s stability. The latest German proposal, from the CDU, that Greek sovereign debt should take a ‘haircut’ is a plausible mechanism for ejecting weaker members from the euro zone. If ‘haircuts’, and the associated capital losses for holders, are to be a standard feature of bail-outs for euro zone member-states, investors will be nervous of holding the sovereign debt of any member that could conceivably run into debt difficulties. The flight of capital from these sovereign debtors might precipitate their break with the euro.

Lewis also believes that the EU Commission and European Central Bank will resist the prospect of debt restructuring, because their authority rests on an extended eurozone.

With that in mind, guess what Commission civil servant Marco Buti said on Tuesday of the current Greek rescue loan mechanism, according to Reuters:

“Let me be very clear – there is not going to be debt restructuring as part of the programme. This has been one of the problems that have created uncertainty in the markets,” he said.

But, as we’ve noted, S&P have now pulled the rug out from everyone. Particularly the European banks still exposed to Greece.

Related links:
Restructuring the Parthenon (Part I)
- FT Alphaville
The depressing outlook for Greece – Felix Salmon
Greek rescue becomes exercise in cat-herding – Alan Beattie / FT