Euro Zone, IMF Reach Deal to Cut Long-Term Greek Debt


Published: November 26, 2012 at 8:39 PM ET

The IMF’s share, less than a third of the total, will only be paid out once a buy-back of Greek debt has occurred in the coming weeks, but IMF Managing Director Christine Lagarde said the Fund had no intention of pulling out of the program.

To reduce Greece’s debt pile, ministers agreed to cut the interest rate on official loans, extend their maturity by 15 years to 30 years, and grant Athens a 10-year interest repayment deferral.

They promised to hand back 11 billion euros in profits accruing to their national central banks from European Central Bank purchases of discounted Greek government bonds in the secondary market.

They also agreed to finance Greece to buy back its own bonds from private investors at what officials said was a target cost of around 35 cents in the euro.

Germany and its northern European allies have hitherto rejected any idea of forgiving official loans to Athens, but EU officials believe that line may soften after next year’s German general election.

Schaeuble told reporters earlier that debt forgiveness was legally impossible, not just for Germany but for other euro zone countries, if it was linked to a new guarantee of loans

A source familiar with IMF thinking said a loan write-off once Greece has fulfilled its adjustment program would be the simplest way to make its debt viable, but other methods such as forgoing interest payments, or lending at below market rates and extending maturities could all help.

No figures were announced for the debt buy-back in an effort to avoid triggering a rise in market prices in anticipation of a buyer. But before the meetings, officials had spoken of a 10 billion euro buy-back, that would achieve a net reduction of about 20 billion euros in the debt stock.

How the official sector restructures, Greece edition

Felix Salmon, Reuters

Nov 27, 2012 14:36 UTC

This deal isn’t just the latest chassé in the long dance between Greece and its creditors; it’s a blueprint for every other European country with unsustainable official-sector debts as well. Including Greece itself, which will surely require another deal like this down the road. And it encapsulates the big difference between the way the private sector likes to deal with big debts, in contrast to the way the official sector does it.

The private sector likes a big one-and-done deal, where you start with a massive debt stock, and then you swap it for something smaller. The key number is the “NPV haircut”: the value of a bond is the net present value of its future cashflows, and so a big cut in coupons, or a terming out of interest payments, can be just as drastic, from a bondholder’s point of view, as a cut in principal. There’s nothing sacred about principal: what matters is the mark-to-market value of the bond.

The official sector, by contrast, holds principal highly sacred. That allows the Germans and others to say that they aren’t forgiving any debt; it also means that no national parliament needs to ratify a bill writing off any Greek debt. On the other hand, the official sector is happy to term out maturities until, as Buchheit puts it, the 12th of never, and also cut coupon payments at the same time.

This is the big difference between the private sector and the official sector. The private sector, if it’s owed $1 billion on April 15, expects $1 billion on April 15, whether the debtor can really afford it or not. Failure to make that payment is a default, and if default is a real possibility, then there’s certainly no way the private sector will lend the country new money to make the payment.

The official sector, in contrast, if it sees a big $1 billion payment due on April 15, will simply term it out for a few years. That doesn’t impair the value of the asset on any official-sector balance sheet: it was $1 billion before, and it’s still $1 billion. And so it doesn’t really help with respect to anybody calculating Greece’s debt-to-GDP ratio, since the nominal amount of debt outstanding never actually does down. But in reality, Greece’s ability to manage those debts is much greater than it would be if the debts were mostly private. Because the official sector, deep down, in its heart of hearts, doesn’t actually expect to ever be repaid.


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