Greece’s messy muddle-through continues

By Felix Salmon
June 24, 2011

The one thing you can be sure of, when it comes to the latest episode in the ongoing saga of the Greek bailout, is that it’s a mess. The WSJ is reporting that the bailout is secure, while Reuters is a bit more cautious, just saying that a deal is “closer”. Everybody knows what needs to happen — but a crucial vote in the Greek parliament still hasn’t happened, and the role of private-sector banks going forwards is also extremely vague:

European banks and finance officials are discussing a proposal to replace existing Greek debt with a different type of bond to get around ratings agencies’ reservations about a planned rollover, two senior European banking sources said on Friday.

The proposal foresees a voluntary rollover of debt into securities of a different and not comparable credit composition to avoid agencies moving Greece to default status, the sources told Reuters on Friday.

“Only by a completely different composition of the bonds would the rating agencies see the restructuring as voluntary and not declare Greece insolvent,” said one senior banker.

Your guess is as good as mine when it comes to the meaning of “completely different composition”, but it sounds a bit like some kind of latter-day Brady bond, with principal guarantees or a rolling interest guarantee or some kind of participation from the EU, perhaps provided by the European Financial Stability Facility. Banks would happily swap Greek debt for bonds partially guaranteed by the EFSF, because such bonds would be more creditworthy; meanwhile, the swap wouldn’t be considered a default, since the exchange would be entirely voluntary.

But we’re not there yet, and in any case such a deal would only be a waystation on the road to a restructuring. Crucially, markets would look very hard at any collective action clauses written into the new debt, to see whether French and German banks, their arms twisted by their governments, could essentially cram a significant haircut onto other bondholders not subject to the same degree of moral suasion.

At some point, inevitably, a Greek restructuring is going to get ugly and fractious. But for the time being, it’s just messy. And we can stay in this muddle-through zone for a long time, while market participants position themselves for the inevitable dĂ©nouement. Let’s just hope that technocrats in Greece and the EU are getting their ducks in a row as well.

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