The FT’s James Mackintosh recently pointed out an interesting provision in the loan agreement Greece has with its bilateral official creditors – its fellow eurozone states.
They are entitled to require Greece to pay the whole loan back immediately if the country defaults on private bondholders. Click the image to enlarge (the full agreement is available here from the Greek finance ministry):
Cross-default clauses like these aren’t too unusual. Some — foreign-law — Greek bonds also have them. The second clause we’ve highlighted appears to suggest that bilateral creditors can waive the repayment demand if they wish (while reserving the right later on). So we doubt this clause will seriously muck up PSI… probably?
Although it’s also a good opportunity to mull over the position of the bilaterals.
They’re a weird bunch. Despite having started lending to Greece in 2010 with the promise that they would rank pari passu with private bondholders, the eurozone states are now singing from a different hymn sheet, typified by the conditions of their loans. (Indeed the agreement actually stated all along that “each Loan… will rank at least pari passu”).
Naturally, there’s no current attention to the eurozone lenders writing off their accumulated exposure to Greece in any way in tandem with the private holders. For a start, eurozone governments will join the IMF in disbursing almost €90bn in new loans to Greece in the coming months, partly to oil the wheels of PSI. About €30bn will flow into recapitalising Greek banks, and another €30bn will provide credit enhancement to the restructured bonds, whether as EFSF paper or cash from the eurozone. The remainder will finance the Greek government deficit.
But the interesting change here is the IMF’s message that it’s focused on working backwards from a debt reduction target, and will work with whatever pragmatic combination of PSI and OSI can be arranged to get there.
While it doesn’t have to mean that the European Central Bank’s private Greek bond holdings get leaned on first, in practice it has, because they are vanilla bonds which can be dealt with on those terms. Hence this drumbeat towards the central bank writing down “profits” on its Greek bonds — writing down from the held-to-maturity par value towards the average price at which the ECB bought the debt, which might be around 70 per cent of face value — or off-loading them to the EFSF or somewhere they can be impaired without the “monetary financing” bugbear getting in the way. Reuters reports that the central bank’s board remains divided on even whether to go along with a write-down plan, but the momentum seems to be carrying them away.
But of course, whether they offload to the EFSF or try to absorb the write-down through an ECB capital call on member states, it’s moving the situation towards a fiscal transfer to Greece, underwritten by the bilateral creditors, in any case. We think that poses a delicate problem (or precedent at least) for the bilateral loan stock proper. Maybe not for this PSI, but when it’s clear that the eurozone will be financing Greece for years to come, one you can’t ignore.
Update (2300 UK time) – We’re talking about the (still pretty out there) case of actual write-offs (aka permanent fiscal transfers) on the bilateral loans here, though as pointed out in comments… both eurozone creditors and the IMF have previously restructured and rescheduled their loans to Greece. Back then that was the bilateral creditors shielding the private sector.
Boot’s on the other foot now.
Related links:
There are official creditors, and there are “official” creditors – FT Alphaville