Wall Street Journal
October 11, 2011
Greece’s second bailout, agreed by euro-zone leaders on July 21, appears daily more likely to be heading for renegotiation. Readers will recall that the deal included a bond exchange that provided a private-sector contribution to the bailout that was so important to Germany. At the time, the exchange was considered a pretty sweet deal for bondholders, given the depth of Greece’s debt troubles. Three months on, it looks even uglier from the other end of the telescope, for three main reasons:
Reason1: Greece is missing its budget deficit targets. The bigger the budget gap, the more finance needed to fill it. The headline €109 billion figure agreed on July 21 thus needs to be larger. The prospect of new loans from the private sector is close to zero, so the extra funds can only come from two sources: more official loans or more concessions from existing bondholders. No prizes for guessing which option Germany prefers.
Reason 2: As we have pointed out before, a sharp fall in Greek bond prices since July 21 makes the bond swap look like an even better deal to bondholders. The new bonds they would receive through the exchange have other benefits to investors—they become more difficult to reschedule again, for example–and drawbacks to Greece. (Remember that the 21% net-present-value reduction agreed on July 21, based on a 9% discount rate apparently plucked out of the ether, will not reduce Greece’s debt by anywhere near 21%.)
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