Brinkmanship in Brussels, Sturm and Drachma for Greece and Europe

by Jacob Funk Kirkegaard

Vox
March 1, 2012

Brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. This column takes a detailed look at the EU deal, the ongoing brinkmanship between the Eurozone and the IMF, and the general focus on austerity.

Just as it did when Congress recently extended the payroll tax cut, brinkmanship has produced an early-morning deal in Europe to extend a new lifeline to Greece and clear the way for the biggest sovereign bond restructuring in history. Both pieces of the agreement – the privately held Greek debt write-down of more than €100 billion and the terms of the new bailout extension – have produced widespread doubts in markets and among many analysts. Accordingly, a more detailed look at both is worthwhile, before considering how this package fits into the ongoing brinkmanship between the Eurozone and the IMF and the general focus on austerity in the Eurozone.

The Greek deal

The agreement on the privately held debt write-down – known as private-sector involvement, or PSI – is no ordinary bond swap, but instead a remarkably complex transaction of unprecedented scale. The ultimate haircut accepted by the private creditors from the Institute for International Finance went up to 53.5% of the principal bond value. Factoring in estimated average reduced coupon payments of new bonds of just 2.63% in the first eight years and 3.65% of the full 30-year period, the ultimate net present-value loss for private creditors looks likely to approach 75%–80%.

The new Greek bonds will be governed by English law, which means that the Greek government will not in the future be able to change the regulation of them. They will also be explicitly treated equally (pari passu) with new official-sector loans from the European Financial Stability Facility as part of a co-financing assistance package to Greece. These sweeteners notwithstanding, it remains the case that private creditors face dramatic financial losses as a result of this bond swap.

More