Greece may succeed in restructuring public debt by adopting Uruguay model
The policy of buying time for the weaker members of the eurozone and banks from core countries holding their bonds as a means of easing off pressure from the area as a whole may be challenged in the months ahead. Even if this is not the case, Greece may have to rethink its plans and exhaust its chances of accessing world markets as soon as possible. This means that the country may have to draw lessons from Uruguay’s successful restructuring of public debt in 2003. Whether or not Greece or other highly indebted EMU countries such as Ireland will be able to get out of this nightmare depends as much on themselves as on the prevailing market conditions and global investors’ perception of the sovereign debt crisis in the periphery of the eurozone. The two-day European Summit in Brussels last week produced, as usual, the expected minimum, with the decision to adopt the permanent mechanism for dealing with sovereign crises in the eurozone after mid-2013 and the shoring up of the ECB’s equity capital. But the economic policy of providing liquidity to peripheral countries appears to be running into trouble as markets put more upward pressure on the borrowing costs of Portugal and Spain by widening their yield spreads over Germany and even pushing German yields higher. It is known that this policy aims at giving more time to the weak to put their public finances in order and also to their creditors, namely banks, insurance companies and pension funds from Germany and France, to deal with potential losses on their bond holdings. However, the provision of liquidity has done little to attract fresh money to the embattled countries, while at the same time scaring off some bondholders and depositors in the weak countries such as Greece. A number of bondholders have taken advantage of purchases by the ECB and the rescue funds to lighten their bond holdings. One does not need to have a PhD to understand why this situation is not sustainable, since the lack of fresh money along with the capital flight will bring about a deeper and more protracted recession, raising the possibility of social unrest. So, Greece may find itself in a more difficult situation in the next few months. This is not just because the recession will hurt more and various special interest groups will resist the reforms required by the troika but also because the global investors’ perception on the success of the current liquidity approach adopted by the eurozone may be changing for the worse. In addition to sticking to the fiscal consolidation course, at least to the extent possible, taking measures to control the debt-to-GDP ratio and pushing forward with the structural reforms in the public sector and sectors of the economy shielded from competition, the government may also have to review its stance on the restructuring of public debt. This means the country may have to think about bringing forward in 2011 any decision to restructure its public debt rather than follow the orthodox route of waiting until the primary budget produces a surplus. Uruguay may be a useful example of debt restructuring for Greece, although the Latin American country had the luxury of devaluing its currency along with restructuring at the time, in 2003. It should be noted that restructuring refers to any action between creditor and debtor that changes the terms previously established for repayment. This includes rescheduling in addition to debt forgiveness. In the case of Uruguay, debt restructuring took the form of rescheduling in the context of the formal deferment of debt-service. In reality, investors were given two choices: First, exchange existing bonds with new bonds with similar coupons and extended maturity for five years in general. Second, receive a smaller number of benchmark bonds that were longer-dated but more liquid than the new bonds under the first option. A big majority of investors, above 80 percent of those affected, accepted the terms, resulting in a loss in the net present value of future flows on new bonds of about 20 percent. One may ask whether Greece could have seen such a high rate of acceptance if it had attempted to reschedule its public debt expiring. i.e. from 2013 through 2016. The answer is probably yes since a great deal of this debt is in the hands of Greek banks, pensions and others, the ECB and European banks which may be «convinced» to accept the terms by their own governments. Some 70 percent of these bonds is estimated to be in their hands by summer 2011. After all, the loss of accepting to increase the maturity of the above Greek bonds by five years or more is estimated to be much smaller than the loss they would have incurred if they marked-to-market these bonds at the current low market prices. So, it is not unimaginable to think that Greece may be able to succeed in restructuring part of its public debt by adopting the approach of Uruguay in 2003. It should be stressed that this form of restructuring has nothing to do with the proposed lengthening of the maturity of the 110-billion-euro loan from the EU and the IMF. Greece may have to look closer at the case of Uruguay to reduce its debt repayments to levels that do not scare off foreign investors in the next few years and exhaust its chances of accessing the bond markets in 2012.
