Restructuring debt with bondholders among options as access to markets gets harder

Athens’s likely failure to meet its 2010 budget deficit target and renewed stress in the eurozone peripheral bond markets, along with talk of an Irish bailout, have made it less likely Greece will be able to borrow on international markets on its own at some point in 2011 or 2012. This means no alternative path in liquidity management should be ruled out, assuming fiscal consolidation is pursued. According to the economic policy program agreed upon with the European Commission, the European Central Bank and the International Monetary Fund last May, the country is to get 9 billion euros from the 110-billion-euro EU-IMF loan this month for measures taken up to September 30. This money is expected to be paid, bringing the total to 38 billion euros in 2010. The country is projected to receive an additional 50 billion euros in 2011, 24 billion in 2012 and 8 billion in 2013 if everything goes according to the bailout program. The EU-IMF is due to disburse another 15 billion euros in February 2011, provided Greece has taken the measures agreed by the end of December. This makes things a bit complicated because Greece’s lenders are widely expected to ask for additional austerity measures to make up for Athens missing the 2010 budget target. The 2010 general government budget deficit is seen widening to 9.3 percent of GDP or more, based on government sources, from an estimated 7.8 percent in the draft 2011 budget. The spillover from a revised 2009 budget deficit to 15.3 percent of GDP, or more, coupled with the smaller-than-expected collection of tax revenues and the larger-than-expected gap in general government entities, such as state-owned utilities, e.g. hospitals, should be blamed for the outcome. There is little doubt that the additional restrictive economic measures will bring about more social discontent in the months ahead, putting more pressure on the government and costing it more votes. Whether or not the government will opt to seek a new mandate in the months ahead, as some believe, remains to be seen. Regardless of political developments, it has become more obvious by now that Greece will not be able to tap the international capital markets on its own in 2011 as government officials hoped and it may not be able to so in 2012 either. For all it is worth, the new permanent EU bailout mechanism pushed for by Germany appears to have contributed to this situation by making private investors less willing to buy the bonds of highly indebted countries such as Greece. Premier George Papandreou confirmed Greece will seek an extension of the maturity of the 110-billion-euro EU-IMF loans to help ease payments in the years ahead. Greece will have to pay more than 70 billion euros annually for some years to service its public debt after 2013. Although such an accord does not do much to help the solvency issue, it does help on the liquidity front. Greek bonds had rallied and spreads over Germany narrowed about 200 basis points or more when talk of extending the maturity of the loans leaked out in the last couple of months. But political uncertainty, some key details of the German-proposed mechanism for dealing with sovereign crises in the eurozone after 2013 and Greece’s failure to meet its 2010 budget deficit goal along with a sharp upward revision of the public debt-to-GDP ratio to more than 150 percent in the years ahead were not known. Although everybody agrees that fiscal consolidation is necessary for the country to produce a general government primary surplus in 2011, one wonders whether Greece should seek a similar voluntary agreement with its private bondholders if it achieves a primary surplus. Supporters of this idea argue that most international institutional investors would have taken the loss by marking to market the Greek bonds in their portfolios by then. Moreover, EMU banks, which hold a good deal of Greek government bonds, will have either done the same or will be willing to take a modest haircut resulting from exchanging some of their old bonds for new ones bearing the same coupon but with longer maturities. They point to Uruguay’s similar experience in 2003 where the average haircut of about 15 percent was almost erased subsequently since the bonds rallied. This enabled Uruguay to tap the bond markets a month after reaching an agreement with 80 percent or more of its creditors. Of course, Greece is different from Uruguay but it is striking that statism was deeply rooted in the Latin America country at the time, as it is in Greece. On the other hand, the opponents of Greece’s reaching a restructuring deal with private bondholders point out that Greek banks, pension funds and individuals hold more than 80 billion euros’ worth of local bonds. According to them, the government will have to bail out its banking sector and its pension system if there is a haircut, that is, a reduction in the value of new bonds compared to old bonds. They also say EMU banks will not be happy about this development and point out that most of them have posted Greek bonds at the ECB as collateral for getting cheap liquidity. In addition, they also point to contagion risks in other EU peripheral countries and the likelihood Greece will not be able to tap the international markets to fund its borrowing needs for years. If Greece does produce a primary budget surplus in 2011, it would be unwise not to look at all available possibilities at the time by taking into account the prevailing market conditions and the state of other eurozone peripheral countries. After all, it is unlikely to be able to tap the market on its own for a long time.