According to several European media, the EU, IMF and the ECB have reached a basic agreement that a debt restructuring for Greece is inevitable, and that they’re currently discussing the details in a new financial rescue package for the practically insolvent Mediterranean nation. The options on the table is said to be a 35% haircut on Greek bonds, swapping the existing 3-year bonds into 30-years and an increase of the total emergency package with 25% – another 50 billion euro.
“Europe is testing the limits of reactive incremental strategy … The laws of economics, like the laws of physics, do not respect political constraints.”
According to British newspaper Financial Times, the talks with Greece on the EU to get a loan of 50 billion. euros from the European Financial Stability Fund (ETCHS) to buy back debt at around 75% of the nominal value and to prolong the loan repayment of 110 billion.
Now, that’s a really beautiful arrangement: borrowing more money from the EU to pay back (or restructure) loans at 65 – 75 percent of their original value.
The paper says that the EU, IMF and the ECB have reached basic agreement that a debt restructuring for Greece is inevitable, with the following concrete options being discussed.
- A haircut of 35%. Technically, this will be an exchange of existing bonds with bonds of 65% of their value.
- A bond swap to 30-year bonds with low interest rates.
- A new loan package of 25% of the previous volume.
The paper also quotes Greek sources as confirming that they no longer expect the rebound of growth to happen immediately.
According to British newspaper Financial Times, the talks with Greece on the EU to get another loan of 50 billion euros from the European Financial Stability Fund (ETCHS) to buy back debt at around 75% of the nominal value, in addition to prolong the loan repayment of 110 billion euro up to 30 years and reduce its interest rate.
The relevant post, signed the newspaper’s correspondent in Athens, relies on sources with knowledge of the discussions.
According to Reuters, a similar deal is discussed for Ireland.
The Greek newspaper writes that the German central bank governor, Axel Weber, support the idea, and believe that the displacement of debt repayment over a long time in conjunction, with the gradual reduction of debt of Member States under Constitution provision, would give the governments of Greece and Ireland had time to make their debt sustainable.
The funding mechanism to support Greece originally provided a three-year grace period for each installment of the loan and repayment period of two years, that payment of the total 110 billion euros by 2018.
In November Eurogroup decided to grant four-year grace period for each tranche of the loan and a seven-year repayment period, that repayment of 110 billion euros by 2024.
If finally adopted, the repayment of 110 billion will be completed in 2043.
Regarding the lending rate, this would not change significantly as 30 years in the lending rate of developed countries ranges between 3.5% – 5%.
By today’s standards that Greece borrowed from the support mechanism with a floating interest rate of around 4%, which if converted into constant is 5.5%. Ireland borrow at a fixed rate of 5.8%.
If extension of time to repay loans in 30 years, the most likely scenario would be to establish the interest rate at 1.5% higher than the German equivalent – at 4.8% to 5%.
According to the schedule of debt maturities by the central government, bonds of 21 billion expires in the period 2034 to 2057.
Even if Greece manages to drastically reduce lending and record constantly primary surpluses by 2024, the debt will still be unsustainable.
According to the news reports. the EU, IMF, ECB and Greece are expected to reach an agreement by Friday.
The financial markets may have offered a recent respite to highly indebted euro zone members, but they will still be forced into early sovereign restructuring, leading economists at the World Economic Forum in Davos said on Friday.
Their warnings come as political leaders and central bankers pledged cast-iron support for the euro but stopped short of spelling out the reforms that will be necessary to stabilize the single currency.
Speaking on Thursday, Carmen Reinhart of Maryland University who has examined centuries of sovereign debt crises, said: “It is very difficult for me to look at the [euro zone] debt numbers and say a restructuring is going to be avoided.”
Her comments were echoed by Larry Summers, until recently chief economic adviser to President Barack Obama. Commenting on the step-by-step nature of the euro zone response to its sovereign debt crisis, he told the Financial Times: “Europe is testing the limits of reactive incremental strategy … The laws of economics, like the laws of physics, do not respect political constraints.”
Okay- let’s check out the sovereign CDS market…here.
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- Europe In Debt (Part 1): Creating a Monster
- Europe In Debt (Part 2): Poisonous PIIGS With Toxic Lipstick
- Please, Don’t Mention “Contagion”!
- EU: No Bail In, Just Eternal Bailouts
- Bail In The Banks – Or Break Up The Euro Zone?
- The Worlds Most Contagious Countries – Here’s The List
- The Brilliance Of A Bailout
- British MEP To Parliament: “Just Who The Hell Do You Think You Are? You Are Very Dangerous People!”
- EU working on “Brady plan” for Greece: report (reuters.com)
- European Union talks on Greek debt as IMF flies in (guardian.co.uk)
- What a perfect time to give a Greek haircut… (forexlive.com)
- Debt restructuring on the cards for Greece (politics.ie)