Could the EFSF engineer a Greek restructuring?
We’re now close enough to a Greek default that the likes of Daniel Gros are coming up with schemes for how to avoid such a thing:
The European rescue fund — European Financial Stability Facility, or E.F.S.F. — should offer holders of Greek paper an exchange into E.F.S.F. paper at the current market price. Banks could be “induced” by regulators to accept the offer.
The E.F.S.F. could then be the only remaining creditor of Greece and propose a bargain to the country: “We write down the nominal value of our claims (say, 280 billion euros) to the amount we paid (say, 150 billion euros) and extend all maturities (at unchanged interest rates) by five years provided you (Greece) agree to additional adjustment efforts (and asset sales).”
This should be too good of a bargain for Greece not to accept since it avoids default and saves the country 130 billion euros. While the E.F.S.F. exchanges the stock of Greek bonds, the International Monetary Fund could finance the remaining deficits in the usual way, with bridge financing until the fiscal adjustment is completed.
Greece would then be left with some I.M.F. debt and the 150 billion euros it owes to the Europeans. Together, this would be about 85 percent to 95 percent of its gross domestic product, which is not far from that of France. It would be high but manageable.
The losses that would be taken by Greece’s private-sector creditors — €130 billion or so — would be small enough to avoid large-scale bank insolvencies, at least outside Greece itself. (What would happen to Greek banks is far from clear.) But it’s not at all clear how this regulatory “inducement” could work.
One problem here is that unless they’re Goldman Sachs, banks don’t mark all their assets to market every day: the current secondary market price might be a more reliable guide to value than anything else, but that doesn’t make it infallible or even in the right ballpark. And of course the minute that the EFSF or anybody else starts treating the market price as some kind of holy benchmark, you can be sure that the market price will start rising dramatically.
A bigger problem is that the market price is a marginal price, being set between a relatively small group of speculative investors with pretty short-term time horizons. (That’s why it’s fine for Goldman to mark to market: when it holds securities it does so on a speculative basis and with a short-term time horizon.)
There’s an enormous group of investors who would never buy Greek debt for anything near the current price, and there’s an equally enormous group of investors who would never sell it at these levels. Those investors, obviously, don’t trade with each other: they simply don’t participate in the market for Greek debt. But Gros’s idea is to drag them into the market against their will, tell them that they’re wrong to stay out of it, and force them to sell at a price they would never normally agree to. Regulatory strong-arming can be effective, but this would be a very tough sell indeed — and indeed would violate the very spirit of markets, where trades are voluntary and done in the knowledge that most investors aren’t actually interested in trading at the current market price.
The point here is that Gros’s plan would never work if the EFSF simply bought up Greek debt in the secondary market — it could never buy enough to move the needle, and if it started buying extremely aggressively, then the price would necessarily rise sharply. So it’s the element of coercion here which is central to the Gros scheme.
And if banks are going to be strong-armed into swapping out their Greek bonds for about 54 cents on the dollar in cash, then it should probably be Greece making that offer, and probably putting a few other options on the table as well. There’s no obvious reason why the EFSF should be the central player in a Greek restructuring, rather than Greece itself.
Any Greek restructuring is going to have a menu of options. If the EFSF wants to be helpful and provide a pool of cash which it will use to fund one or more of those options, great. But that’s just the beginning of the process — it’s not a fully-fledged scheme in and of itself.