The Greek Solution

by: Tom Lindmark

In case you missed it, the Euros pretty much executed the mother of all can-kickings Tuesday as they rolled out their latest scheme to solve the Greek debt debacle. Basically the Greeks were told by the powers that be not to worry about repaying any debt for the foreseeable future and they would also cut their interest rate, I guess because they were already in a Christmas sort of mood.

Reuters has the details, but here is their summary:

To reduce the debt pile, ministers agreed to cut the interest rate on official loans, extend the maturity of Greece's loans from the EFSF bailout fund by 15 years to 30 years, and grant a 10-year interest repayment deferral on those loans.

German Finance Minister Wolfgang Schaeuble said Athens had to come close to achieving a primary surplus, where state income covers its expenditure, excluding the huge debt repayments.

"When Greece has achieved, or is about to achieve, a primary surplus and fulfilled all of its conditions, we will, if need be, consider further measures for the reduction of the total debt," Schaeuble said.

Eurogroup Chairman Jean-Claude Juncker said ministers would formally approve the release of a major aid installment needed to recapitalize Greece's teetering banks and enable the government to pay wages, pensions and suppliers on December 13 - after those national parliaments that need to approve the package do so.

If you're looking for some analysis I suggest Felix Salmon's post on the developments. While you're at it take a look at this interview he did with Lee Buchheit about a week ago on the subject of sovereign restructuring. Both posts are top notch and Buchheit's analysis was eerily prescient.

My first reaction is let's wait and see if this amounts to anything more than all of the previous schemes to solve the problem. If I read Felix's analysis properly it does indeed amount to a permanent fix of sorts. Whether it becomes the template for other EU countries is problematic as Buchheit notes such a similar move in Spain for example would wipe out the financial sector. Still, there are probably ways to paper over that issue.

So what happens now? Do the Greeks collectively exhale and continue down with structural reforms absent a sword hanging over their necks or do they backslide into the old ways comfortable in the knowledge that they've been granted a relatively lengthy stay of execution? Go ahead and guess, I have no idea. I do think that Felix hit the nail on the head with this observation:

I don't know if anybody's done the math to work out what the effective NPV haircut is here, especially if you also add in things like the way that Greek interest payments are going to get recirculated back to Greece in a weird kind of rebate program. In a way, it doesn't matter, because the lesson here is that when push comes to shove, the official sector will always agree to let Greece (or any other troubled Eurozone country) term out its obligations instead of risking a default.

So, Armageddon is at least deferred for some time if not actually taken off the table. How long and at what levels this sort of financial engineering can be sustained is an open question. I suppose we will sooner or later have an answer to that one from the markets.