New debt haircut an increasingly likely scenario

The prospect of a new haircut on Greek debt, which this time will affect the bonds and loans held by the official (public) sector, is increasingly being viewed as a possibility.

The Finance Ministry has drawn up an analysis of public debt until 2020, which includes the scenario of a two-year extension to the fiscal adjustment effort beyond 2014.

If the extension is granted by the country?s creditors, the additional 11.5-billion-euro package of budget savings now demanded by the troika (as Greece?s international creditors are collectively known), will be spread over four rather than two years. According to sources, under this scenario, the recession will be limited to 1.5 percent in 2013 and the country will return to 2 percent growth in 2014. By contrast, without the beneficial effect of the extension, GDP is seen contracting by around 3 percent next year and 0.6 percent in 2014. This year the recession had been projected at 7 percent but first-half data was encouraging enough to lower this figure to 6 percent.

The government is well aware that for the two-year extension to be approved by the creditors, it has to present a credible proposal for the savings package. This is also considered the ?passport? for the disbursement of the next bailout installment of 31 billion euros. The extension will improve conditions for the viability of Greek debt but will also create an additional borrowing requirement of around 25-30 million euros for the two extra years.

The apparent reluctance of eurozone countries to fork out any more loans for Greece has recently given rise to growing calls for a second haircut on Greek debt. This will concern the bonds held by the European Central Bank and national central banks of the eurozone, as well as the state loans granted mainly through the European Stability Mechanism.

Bloomberg yesterday cited German lawmakers saying that Chancellor Angela Merkel is considering easing Greece?s bailout terms and looking into how the tough line can be abandoned. European officials tell Kathimerini that if the two-year extension is granted, some form of official sector involvement (OSI) in reducing Greek debt will be inevitable.