We’ve been here before.
Now that talk of Greek debt restructuring has once again reared its head we’re starting to get those ‘who holds Greek bonds’ notes (again) . And here’s a nice one from Citi’s Greek banking team.
(And a H/T to Citi for that inspiring title too)
First, though, the question of whether there’ll be a Greek haircut at all:
The decision of whether to haircut or not is a cost-benefit analysis. For Greece, we believe, the pros include: immediately lower interest payments; faster progression to positive fiscal balance; and less pressure on the government to press on with austerity measures. The cons for Greece could include: denied access to the capital markets; deterioration in relations with Euro Area and EU members (if the haircut is done “prematurely”); and a round of recapitalisation for the domestic Greek banking sector and some Government entities (such as the social security fund). In order to minimise the cons of haircutting, Greece will likely await a macro inflection point — where real GDP growth starts turning positive and the primary balance enters positive territory. This is important as it could potentially allow Greece easier re-entry into the capital markets. Such an inflection point, according to our and other market participants’ estimates, could be the year 2013.
2013 is also the year when the European Stability Mechanism — the eurozone’s debt restructuring-enabling bail-out thingy — comes into effect. It’s some way off, but note too that Citi argue there could be a convincing case for restructuring sooner rather than later.
In fact, they think that’s what the bond market is pushing for (if not, presumably, the banks) :
As for the debtholders, we believe that most have come to the conclusion that some sort of haircut is needed, especially as the austerity measures are not bringing in the desired results as quickly as hoped. At this point, debtholders would rationally want to minimise the amount of haircut taken … we calculate the “incremental” haircuts debtholders would suffer if they were to wait a certain number of years from today. For example, to bring the Debt/GDP ratio down to 90% in 2011 would mean a 52% haircut, 63% haircut in 2012, 68% in 2013, 70% in 2014 and 70% in 2015. Hence, the marginal haircut (“damage”) from waiting longer diminishes quickly — this is in-line with the expected recovery in the primary government balance and the return of real GDP growth. Therefore, we see two rational strategies for debtholders:
- *Option 1 — “Act Now”: Insist on restructuring as soon as possible in order to avoid more haircutting in later years. The market (see Figure 14) seems to be voting for “Act Now”, or rather act within the next two to three years. The yield on the 3Y GGB is 21.1% compared to the 30Y yield of 9.6%.
- * Option 2 — “Pretend and Forget”: as the “haircut curve” starts to flatten out beyond year 2015, debtholders could close their eyes, help refinance maturing Greek debt, and hope that Greece slowly finds its way out. But this could be a long wait and may require concessions such as extending maturities. In addition, no country with Debt/GDP ratio of more than 150% has ever avoided a default anyways. Why would Greece be different?
(Except — ahem, Japan)
Anyway, if you were to haircut Greek debt the effects would be pretty obvious. Greek banks would need to be recapitalised — and remember that would be on top of the €8bn they already raised between 2009 – 2011, €3.7bn of which came from the Greek government. Here are Citi’s workings:
Below we analyse the exposure of seven Hellenic banks to Greek government debt. These seven banks own collectively €36bn of Greek government bonds (GGBs) and loans to the Greek state, representing 173% of their 2012E shareholders’ equity. As such, any haircut would have meaningful consequences for the banks’ capital position.
A current mark-to-market would wipe off €8bn off the banks’ €18bn of 2012E CET1 capital, making the 2012E CET1 ratio under Basel 3 decline from 10.9% to 6.0%. Postal Savings, Agricultural and Piraeus would be most affected by a MTM.
Next we present sensitivities of the CET1 ratios to various scenarios for GGB haircuts. For each 10% additional haircut, the banks’ CET1 ratio declines by c.180 bps. Under a 40% haircut, the banks’ CET1 ratio in 2012E would be 5.3% (down from 10.9%), thus requiring a recapitalisation of c.€4bn to achieve 7% CET1 ratio. Such a capital raise would represent 20% dilution to 2012E shareholders’ equity. Based on this analysis, Agricultural, Piraeus and Postal Savings look most vulnerable.
And let’s not forget other European banks — also exposed to Greek debt:
And of course, let’s not forget the European Central Bank.
The ECB was the not-so-proud owner of about 12 per cent of outstanding Greek debt at the end of 2010 thanks to its bank support. That’s just 2 percentage points shy of the amount owned by Greek banks (14 per cent) and three percentage points away from the amount held by foreign banks (15 per cent).
Related links:
Hurdles to a Greek debt restructuring - FT Alphaville
Greece and its most grim sovereign-bank loop – FT Alphaville