What Fresh Hellas is This?

by Andrew Stuttaford

The New York Times notes here how Greece was able to “strong-arm most of its private bondholders into accepting the debt reduction deal it completed Friday”. True enough, but note that “most”. In its ability to bully those bondholders Greece was given an enormous helping hand by the fact that most (but not all, which raises some interesting questions) of those bonds were subject to Greek law, something that Athens was able to use to its advantage when, last month, the Greek legislature retroactively amended the rules governing those Greek law bonds to include “Collective Action Clauses” that made it possible for hold-outs to be coerced into accepting the deal. We’ll have to see what happens with respect to those bonds that are not governed by Greek law. 

The precedent will be well worth watching. The new bonds received by the bondholders in exchange for the old are governed by English law: Next time Greece runs into trouble (and there will be a next time), the option of changing the rules retroactively will no longer be available to help “restructuring” along. And if that means that Greece slips into a “hard” default, it faces a high probability of being shut out of the international capital markets for years to come: just ask the Argentines.  

The N.Y. Times report continues:

As a result of Friday’s deal, the bulk of Athens’s 260.2 billion euros ($341 billion) in remaining government debt will now be held by the International Monetary Fund, the European Central Bank and the individual European nations that have lent Greece money and contributed to the region’s bailout fund…. Greece’s main creditors, in effect, are now foreign taxpayers — who are likely to be much less malleable than the private creditors if Greece needs to renegotiate its staggering debt load a year or two down the road.

It will.

As recently as 2008, virtually all of Greece’s government…debt was held by private sector bondholders…But as a result of Greece’s escalating debt crisis and intervention by public institutions, private creditors now hold only 27 percent of Greece’s debt.

Greece, in essence, has become a financial ward of Europe. And, because the I.M.F. will probably be reluctant to put in new bailout money in the coming years, the burden will increasingly fall to Europe, led by Germany, to finance Greece. That will very likely happen directly, through country-to-country loans, and indirectly, through the euro zone’s rescue fund — the European Financial Stability Facility, to which most members of the euro currency union contribute.

As a rule, the I.M.F. does not accept haircuts and insists that its loans are always senior to all other obligations. European politicians, meantime, already under heavy criticism from voters for their countries’ increasing financial exposure to Greece, would have a difficult time explaining why they must take write-offs on some of their Greek debt because Athens still cannot balance its books.

Indeed they would.

On the other hand…

Many analysts say, too, that there may be a benefit to the public sector’s now being Greece’s largest creditor. It might be easier for creditor nations to take collective steps to aid Greece before the next crisis hits, as opposed to trying to persuade a diffuse community of public and private investors, with different interests and agendas, to reach an agreement.

But for Greece, the drawback of owing so much money to Europe and the I.M.F., even at lower interest rates and longer maturities, is that the obligation will always be there.

“Greece is staring at decades of interest payments to the official sector,” said Adam Lerrick, a sovereign debt expert at the American Enterprise Institute. “They traded their ability to write down debt to private sector creditors for low-interest-rate official sector loans that cannot be reduced.”

Sisyphus would understand.

Greek voters may not be so patient. 

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