Oh dear — all that hefty repricing action on Greek short-term bond issues on Monday. Nasty. Looks like some in the market have started to price in the prospect of Greece restructuring its debt in spite (or part) of the Eurozone rescue activated on Friday.
But how likely is that prospect?
Not very — however you choose to game out ‘restructuring’, as two Barclays Capital research notes have made rather plain.
First, as Piero Ghezzi and Christian Keller argued on Monday, haircuts as a form of restructuring wouldn’t actually do a lot more to help Greece restore solvency than what it’s been doing already:
Our calculations highlight the fact that debt reduction can only partially substitute fiscal adjustment. For example, even if Greece were to reduce the debt stock by 90%, it would still have to undertake a primary balance adjustment of 7.5% to have a stable debt to GDP path. This would be about 6pp of GDP less than in our hypothetical scenario where solvency is achieved without any debt restructuring, but still a substantial fiscal effort. [See handy haircut-to-adjustment chart below:]
Alternatively, a stable government debt ratio of around 60% of GDP under the given interest rate and growth rate assumptions would be achieved by a primary fiscal adjustment of close to 10% of GDP combined with a close-to-50% debt reduction in end-2010. In other words, a 50% debt reduction only would buy less than 4pp of GDP of adjustment pain; or put differently again: any reasonable haircut reduction will require a very sizable fiscal adjustment under any circumstances, as the breathing space of an incomplete write-down could be very short lived.
The same argument is made by the chart below:
So much for direct haircuts on Greek bonds, then. Ghezzi and Keller also pour cold water on other forms of restructuring, such as a debt maturity switch to get rid of short-term issues.
This might keep Greece’s stock of debt down, but at the expense of keeping interest rates on the rest of that debt high for years to come, they say.
In which case, it would appear the maturity switch plans aired in this NYT piece, for example, are unlikely to come to pass.
Plus, as Laurent Fransolet and team argue in BarCap’s Global Rates Weekly, there’s not much incentive for the Eurozone to force restructuring in the short term:
Overall, it seems quite unlikely that other euro area countries, having (eventually) decided to help, would afterwards decide to force a restructuring and take their money out after three years. The loans outlined in the package can be for longer periods than three years (although there is a 100bp surcharge for ‘amounts outstanding for more than three years’), and the loans could also be taken over the length of the next three years, for the same periods. Further, the political implications would also be quite daunting. This means that EU support will not disappear after the end of the three-year package. More likely, any such loans (or guarantees, as seems to be the case for Germany) would be rolled over, and the ‘real’ seniority (although unwritten) would be on the IMF portion of the debt, rather than on the euro area official side.
There’s not much point, or room for manoeuvre, for sudden debt restructuring, then.
But both notes raise some interesting points about a slightly more distant process for renegotiating Greek debts.
As Fransolet and team observe, for example, Greek government debt is mostly held by domestic banks and pension funds, with whom a voluntary bond exchange could more easily negotiated than with foreign investors.
Secondly, if European governments remain in the loan mechanism beyond three years — well, then surely that means leverage over Greek decision-making. In which case, we’d note this point from Ghezzi and Keller:
Over time, the cost benefit calculation [of haircuts] may change in a number of dimensions. It is the sudden nature of a Greek restructuring that could be very painful. However, if over the next months/years it becomes increasingly clear that Greece is failing to get closer to solvency, whereas other European countries manage to differentiate themselves, then a Greek restructuring may have significantly milder effects. We just doubt it can happen very soon.
In short, the Greek debt problem is a marathon, not a sprint, as they conclude. True.
Except we note that the first Greek to run a marathon promptly dropped dead at the end of it.
Related links:
Greece and the issue of sovereign TBTF – FT Alphaville
Guest post: Mohamed El-Erian on the worsening Greek problem – FT Alphaville