Delaying Greece?s debt restructuring by more than a year reduced banks? potential losses as firms trimmed their holdings and most of the risk shifted to European taxpayers.
When Greece was first rescued by the European Union and the International Monetary Fund in May 2010, lenders in other EU nations held $68 billion of its sovereign debt, according to the Bank for International Settlements. If Greece had defaulted, banks would have lost $51 billion at a 25 percent recovery rate.
Banks? holdings of Greek bonds fell by more than half to about $31 billion over the next 15 months, according to BIS, cutting creditors? losses at last week?s swap by at least 45 percent. Lenders are protected against further losses thanks to sweeteners from the EU to encourage the exchange. Meanwhile, Greece?s debt remains almost unchanged and the risk of future default is now mostly borne by the public. The same playbook is being used with Portugal and Ireland.
?This is a horrible deal for the EU taxpayer,? said Raoul Ruparel, chief economist at Open Europe, a London-based research group. ?The longer we wait for these restructurings, the worse the deal gets for the public. There?s an ongoing risk transfer from the banks to the taxpayers.?
On the face of it, the swap chopped 137 billion euros ($179 billion) from Greece?s 368 billion-euro debt burden. The actual reduction is less than half of that because the country has to borrow from the EU and the IMF to provide new debt to private creditors and to recapitalize banks and pension funds that can?t handle losses from the swap.
The new borrowing — in effect, replacing private with public debt — will amount to 78 billion euros, according to the EU, leaving the actual relief from the swap at 59 billion euros. Greece also will need to draw money from a second, 130 billion-euro EU and IMF rescue fund to repay other private debt and finance the government?s budget deficit.
That will leave Greece?s debt at 161 percent of gross domestic product at the end of the year, 4 percentage points less than the current level, according to a March 11 report by the European Commission. The ratio probably will return to 165 percent in 2013, the commission said.
When all IMF and EU loans promised to Greece are disbursed, 66 percent to 75 percent of the country?s debt will be held by the public. In 2010, before the first bailout and before the European Central Bank started buying its bonds, Greece had about 310 billion euros of debt, all held by the private sector.
If Greece has to restructure again, or defaults, taxpayers will be on the hook.
?The swap doesn?t achieve debt sustainability for Greece,? said Nicola Mai, an economist at JPMorgan Chase