The news out of Greece isn’t good. Remember here that Greece itself is basically just an intermediary, stuck between the Troika (EU, ECB, IMF) on the one hand, which is going to fund its deficits for the foreseeable future and therefore can demand anything it wants, and bondholders, on the other. And the problem is that what’s acceptable to the bondholders — a 4% coupon, basically, on restructured debt — is unacceptable to the Troika:
Euro zone finance ministers on Monday rejected as insufficient an offer made by private bondholders to help restructure Greece’s debts, sending negotiators back to the drawing board and raising the threat of Greek default…
Jean-Claude Juncker, the chairman of the Eurogroup countries, said Greece needed to pursue a deal with private bondholders where the interest rate on the replacement bonds was “clearly” below 4.0 percent.
In a way, this is a good thing, because it only serves to clarify the fact that Greece is defaulting in a way that’s going to make its bondholders very unhappy. All the talk of a “voluntary” restructuring was a way of attempting to paper over that fact, and that paper was always extremely thin. Maybe a bit of honesty will help people face up to reality in a way that they’ve been very reluctant to do until now.
Richard Barley has another idea which might help: the ECB could swap its Greek debt for EFSF debt, and then the EFSF could tender those bonds into the exchange. That, he says, could give Greece some €25 billion of extra debt relief, making the mathematics of a deal easier to work out.
I’m not entirely sure about this. The EU is already helping Greece enormously by funding Greece’s deficits going forwards. If the private sector were willing to do that, then it might not need to take such a big NPV haircut. Barley’s asking for Europe to both provide new money for Greece and take losses on the money it’s already lent, and I don’t see why Europe should have to do that now. Let’s do the private-sector restructuring first. The EU is surely going to take losses on its Greece loans at some point, but there’s no reason to do that at the same time.
No one thinks of this deal as a “one and done” restructuring. Bailing in the ECB or the EFSF at this point would just be denial: it would encourage the EU to think (or at least to say) that the Greek debt problem was solved for perpetuity, when it clearly isn’t. So let’s force the private sector to take its big NPV haircut now. And then the next step can come a few years down the road, when Greece discovers it can’t pay the Troika what it owes.