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End of Act 1

9 Mar 2012 By Neil Unmack

It could have been worse: that’s the best thing to be said about the Greek debt swap. The euro zone’s first restructuring will not be chaotic. But it has done away with the pretence that a euro zone sovereign’s signature is golden. And Greece will still struggle with a heavy debt load.

The good news is that enough bondholders agreed to the Greek plan to allow Athens to force losses on the recalcitrant private creditors through collective action clauses. Some owners of securities subjected to non-Greek law are holding out, but the hit rate will be at least 95.7 percent. That should allow the second Greek bailout in 18 months to proceed. The deal will trigger a payout on credit derivatives. A failure to trigger would have compromised the credibility of other sovereign default swaps, which are important hedging tools for banks.

Still, the restructuring has costs. Arguably, it wasn’t fair. Private creditors have been punished for lending recklessly, but public-sector lenders have got off lightly even as this second bailout was the proof that they had bungled the first one. The European Central Bank’s holdings of Greek bonds have been protected; euro zone governments have not haircut their loans, although they did agree to charge lower interest rates. This unequal treatment will weigh on the prices of bonds sold by other weak states. More broadly, the euro zone must now cope with a world where sovereign creditworthiness has been impaired, affecting borrowing costs across the region.

Even for Greece, the restructuring isn’t particularly good news. Despite wiping about 100 billion euros from its debt pile, Greece will still have debt equivalent to 168 percent of GDP next year – which will only come down to 120 percent by 2020, at least if all goes according to plan. That will weigh on Greece’s growth and its population’s appetite for reform.

The new 30-year bonds issued under the restructuring could be expected to trade at about 28 percent of face value, according to Breakingviews calculations, assuming a discount rate of 12 percent. The current price in the unofficial “grey” market is about 20 percent, suggesting markets expect more losses. After the biggest sovereign restructuring in post-war history, Greece is only at the end of Act 1.


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