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Now or never

20 October 2011 By Neil Unmack

Greece needs a proper debt restructuring. Getting the country’s borrowing under control requires a serious haircut for both private creditors and euro zone governments. If it happened today, private bondholders could bear most of the losses, according to Breakingviews’ latest calculator. But if the euro zone delays, taxpayers will suffer more.

By the end of 2011, Greece’s debt will be 357 billion euros, according to government forecasts – more than 160 percent of this year’s forecast GDP. To be sustainable, this ratio should probably be halved to about 80 percent. That would give Greece breathing room to recapitalise its banks and finance its budget deficit.

Some debt is protected: the International Monetary Fund is a preferred creditor, while politicians may also exclude Greece’s T-Bills – short-dated securities the country needs to manage its cash needs – from any restructuring. That leaves euro zone governments, which have lent Greece 53 billion euros, the European Central Bank, which owns Greek government bonds worth perhaps 45 billion euros, and private creditors who are owed the remaining 223 billion euros to split the pain.

If private bondholders took a 60 percent haircut today, the public sector would have to write down its debt by almost 50 percent, or about 47 billion euros.

Politicians might try to avoid this unpopular move by opting for a voluntary debt swap, such as the deal brokered by the Institute of International Finance. But this will do little to ease Greece’s debt.

Meanwhile, the euro zone’s exposure will increase. By the end of 2012, the euro zone and the IMF will have lent Greece another 32 billion euros to fund its deficit and bond redemptions. And Athens will have borrowed a further 71.4 billion euros to buy back debt and fund the collateral it has promised to private creditors under the debt swap. It will probably also have pumped more capital into its banks.

If private creditors take a 60 percent haircut next year, official loans would have to be written down by 67 percent to reduce Greece’s debt to 80 percent of GDP – a loss of 120 billion euros, according to the calculator.

Governments could disguise the pain by stretching out loan repayments and slashing interest rates. Even so, politicians would have a hard time explaining why they put more taxpayers’ cash at risk when Greece’s debt was clearly unsustainable.


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