Greece and the investors who bought its bonds have the beginnings of a deal that could avert a disastrous, long-feared Greek default on its debt. But don’t expect a celebration on Wall Street this week.
If the deal holds and works, it will help prevent a potential shock to the world banking system. It will also remove one of the biggest threats to the impressive rally in US stocks this year.
The problem for investors is that good news – like real improvement in Greece’s long-term finances – is likely to develop in slow motion. Bad news, like a breakdown in the debt talks or a spasm of market fear, would be faster. Punch-in-the-nose fast.
“I think they’ll probably be happy, but I don’t really see this accomplishing very much in the long term,» says Michael E. Lewitt, editor of The Credit Strategist, an investor newsletter.
“They’re not solving any of these problems,» he says, so if things go wrong, «it’s likely to be a much worse sell-off.”
Under the tentative agreement, announced Saturday, investors holding euro206 billion in Greek bonds, or about $272 billion, would exchange them for bonds with half the face value. The replacement bonds would have a longer maturity and pay a lower interest rate.
The deal would reduce Greece’s annual interest expense from about euro10 billion to about euro4 billion. When the bonds mature, Greece would have to pay its bondholders only euro103 billion.
It is unclear how investors who buy and sell the bonds of other debt-burdened countries, such as Italy, Spain and Portugal, will react. If they drive up borrowing costs for those countries, the debt crisis could get worse.
Private investors hold two-thirds of Greece’s debt, which is equal to an unsustainable 160 percent of its annual economic output. By restructuring the debt, Greece hopes to make it a more manageable 120 percent by decade’s end.
Greece’s public creditors – the International Monetary Fund, the European Union and the European Central Bank – want the government to cut public salaries further to bring the national budget in line.
That proposal has been met with resistance by Greek politicians afraid of losing elections this spring. But they also worry Greece will be denied euro130 billion in bailout money if it can’t cut its deficit.
The restructuring of Greece’s private debt could still fall apart. If it does, that could mean trouble in the US markets, which have enjoyed a placid January of steady gains.
The Dow Jones industrial average is up 3.6 percent in the young year. The Standard