Greece’s interest burden, post-PSI, will remain huge
It seems Greece has finally reached a deal on austerity measures needed for a bailout. But what about PSI?
(ECB President Mario Draghi just said he heard it was close to a deal. It’s been close for a few weeks though…)
JP Morgan says Greek PSI is hardly going to change the heavy interest burden on the country and the issue of default will inevitably come up.
First of all, Greece’s interest payments are huge.
Greece paid 15.5 bln euros in net interest payments in 2011, 17% of total general revenues. This is the highest among all OECD countries and more than 3 times the OECD average of 5%. It is also more than double the 8% average for other peripheral countries in the euro zone.
The U.S. bank estimates the Greek PSI is going to capture 205bln euros of private bond holders (and perhaps a further 55bln euros if the ECB participated).
Of this 260 bln euros, around 85 bln or a third are held domestically, by Greek social security funds, domestic banks to be largely nationalised post PSI, and the Greek central bank.
Any relief stemming from these 85 bln euros is of no help to Greece. In other words the effective debt relief to the Greek state stems from the remaining 175 bln euros.
Currently, Greece pays an average coupon of 4% on its existing bonds. If we assume a coupon of 2.75% on the new Greek bonds post-PSI and a 50% principal haircut, the annual interest burden changes by 3.7 bln euros to around 12bln.
So even if we assume 100% participation in the Greek PSI including the ECB, the net interest servicing burden will be 13% of total government revenues.
These calculations question Greece’s debt sustainability post PSI, and raise the issue of whether a partial suspension of interest payments to official loan obligations should be given to Greece.