Greek debt: cheap but no bargain

November 8, 2011

Even if Greece avoids default, bankruptcy and ejection from the euro zone, its debt is not yet looking attractive.

At first sight maybe the bonds seem alluring, with five and 10-year bonds trading at around 33 cents on the euro, compared with the latest proposals of a haircut of 50 percent, valuing Greek bonds at 50 cents.

If Argentina’s $100 billion default in 2002 is anything to go by, however, Greek debt could yet fall to 25 cents on the euro, as bondholders stay doubtful that even the current terms, revised from initial proposals of a more modest 21 percent haircut, are the last, or worst to come.

Stuart Culverhouse, chief economist at frontier markets broker Exotix, says commercial creditors have lost faith in euro zone leaders after being forced to share more of the pain of Greece’s indebtedness. They’ve learnt the hard lesson that:

The official sector increasingly sees (euro zone) solutions as the private sector’s problem and that principles of burden-sharing between the official and private sector take second place.

Worries in the private sector about how  large the debt write-off will eventually be are likely to mean that as soon as the ECB and EFSF stop buying up euro zone debt, peripheral bond prices will slump.




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