by Richard Barley
Wall Street Journal
June 28, 2011
France's plan for a rollover of Greek bonds has helped restore some calm to jittery markets. Some have compared it to the Brady plan that helped end the Latin American debt crisis of the 1980s. The plan has some positive aspects, particularly for the creditors. But it's not clear whether it helps Greece, and it may yet fall foul of the ratings agencies.
As outlined, banks would roll 50% of their exposure into new 30-year Greek debt and park 20% in high-quality zero-coupon European bonds that will rise in value over time, thereby providing insurance against a future Greek default. That would help plug the funding gap Greece faces and which governments are balking at covering.
For lenders, the deal has some attraction: Lenders would recover 50% of their Greek exposure—perhaps a better outcome than they would suffer in a default. They could then gain on both their new triple-A securities and on the Greek bonds, particularly if interest payments are linked to gross domestic product growth as suggested. But this is far from being a Brady deal, under which the borrower offered bonds backed by U.S. Treasurys, making them more attractive; in this case, lenders are paying for their own insurance.
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