The Great Debate UK
from The Great Debate:
Amid all the doom and gloom about Greece in the last few weeks, it is easy to overlook an important piece of good news: the debt exchange offer published by Greece on Friday with endorsement by its main private and official creditors. If implemented, this would be a major achievement and an important step toward overcoming the euro zone crisis, almost regardless of what happens next.
Under the offer, bondholders would receive 15 percent of the face value of their bonds in the form of short-term European Financial Stability Facility (EFSF) bonds, plus a set of new Greek sovereign bonds maturing between 2023 and 2042, with a 31.5 percent face value.
This agreement is a very good deal for Greece. The combination of the cut in face values, lower coupons and (in most cases) longer maturity implies a debt reduction of about 60 percent in present value terms (evaluated at a 5 percent discount rate). Assuming high participation (about €200 billion in bonds), this translates into savings of about €120 billion, or 54 percent of Greece’s 2011 GDP. This is very large. By comparison, the Argentine exchange of January 2005, the previous high-water mark, generated present value of debt relief of only about 29 percent of GDP, because although the per-dollar debt reduction was higher, the volume exchanged was much smaller.
Private creditors are also getting a good deal. Although they are being hit hard, they could have done much worse. You will see claims that the “haircut” suffered by creditors is on the order of 75 percent. These are exaggerated, because they compare the present value of the new bonds with the face value of the old bonds. But in a pre-default debt exchange, creditors never have the right to full immediate repayment. They only have the right to keep their old bonds and expect them to be serviced.
Michael Gove trying to laugh off Monday’s rebellion by 81 backbenchers sounds like a United supporter arguing that 6-1 was more or less a draw. For all the excuses, he can’t hide the fact that the government’s position is full of contradictions.
On the one hand, the PM has added his voice to the chorus calling for the euro zone to turn itself into a monetary-and-fiscal union, a proposal which certainly goes with the grain of the crisis. The idea has the support of the Americans and would probably be warmly welcomed in Asia too. In fact, it has great appeal everywhere except in the euro zone itself, where the main protagonists themselves have got a severe attack of cold feet.
Once again German Chancellor Angela Merkel has had to dig deep to ensure that the euro zone can limp along for a little longer without any single nation defaulting.
And this story changes day by day. No sooner has Germany rescued the euro, Greece apologises and says they can’t meet the deficit targets – no more savings can possibly be achieved through austerity.
The euro zone debt crisis has now spread from the sovereigns – after the ECB came in and purchased Italian and Spanish debt – to the banking sector. Although the EU authorities put in place a short-selling ban, which has another week to run, the banking sector is back at the pre-ban levels or in some cases even lower.
Europe’s banks are by and large less capitalised than their U.S. peers. They are also exposed to Europe’s sovereign debt and European loan books. Even if a member state manages to avoid a default, growth is now slowing and we could be in line for another recession that would most likely increase bad debts and further erode banks’ profits.
Whenever I see photos of Chancellor Merkel these days, I’m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the “Deal to Save the Euro” are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.
First, the package is a compromise – a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.
Markets thrive on certainty. Anything that smacks of uncertainty, fence-sitting or indecision will lead to market turbulence, as investors punish those who don’t tell them how it is.
This is exactly what we are seeing in Europe right now. The markets are losing patience with the EU’s inability to come up with a credible plan to fight the sovereign debt crisis and that is why it is escalating at an alarming rate.
By Laurence Copeland. The opinions expressed are his own.
Here we go again – the same sickening feeling, as stock markets reel amid a flight to “safety”. For months, there have been worries about contagion from the Greek imbroglio, and now the nightmare seems to be coming true, as one after another the weak European economies are put to the sword.
First came Greece and Ireland, then Portugal, now it’s the big league – Spain and, even bigger, Italy (and don’t forget Belgium, an accident waiting to happen for many years now, not very important in pure economic terms, but psychologically significant as the home of the whole sorry euro disaster).
By Kathleen Brooks. The opinions expressed are her own.
The markets always suffer from a chronic case of short-termism, but once a sovereign debt crisis takes hold it is very difficult to reverse. Investors may be concentrating on Greek, Irish and Portuguese funding needs for the next 24- 36 months now, but it won’t be long before investors start to scrutinise longer-term liabilities that are currently being clocked up for the next 10,20 even 30 years.
Another week another round of EU officials proposing solutions to the Greek insolvency problem.
First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.
– John Keilthy is Managing Partner of ReputationInc Ireland and is a former business journalist and director and chief operating officer of NCB Group. Andrew Hammond is a Director in ReputationInc’s London office and was formerly a UK Government Special Adviser. The opinions expressed are their own. –
In recent weeks, the focus for Ireland and indeed the world’s financial markets has been on devising a plan to remedy the country’s precarious banking and fiscal affairs.