Greece: At Last We Have a Deal

After 13 hours of negotiations, the Eurogroup finally reached a deal on a second rescue package for Greece. During the night, measures were taken that should cut Greek debt from 129% of GDP to 120.5% of GDP in 2020. Needless to say, it is impossible to project debt developments until 2020 with such precision, but the figures have been used as a negotiating tool to push through some extra measures. The measures are:

1. Private investors accept to take a haircut of 53.5% instead of 50% in the PSI. We have not seen any news on whether the interest rates have been altered as well.

2. The interest rate on EU loans to Greece will be lowered again. This should lower the debt ratio by 2.8 percentage points in 2020.

3. The ECB’s profit from its holdings of Greek bonds in the SMP programme will be returned to Greece. To avoid legal problems, this will be done as follows: ECB profits will be disbursed to the NCBs, which will then disburse the profits to the governments, which can then return the profit to Greece.

4. Governments of member states where central banks currently hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income accruing to their national central bank stemming from this portfolio until 2020.

Next step is PSI and CACs
The PSI debt swap is expected to be launched on 8 March and completed three days later. The bonds will be swapped to Greek government bonds with maturities ranging from 11 to 30 years worth 31.5% of the principal amount. Investors will also receive short-dated securities worth 15% of the principal amount issued by the EFSF. The interest rate on the Greek bonds will be as low as 2% until February 2015, 3% for the next five years, and then rise to 4.3%. Bondholders will also be offered separate GDP warrants that give extra yield if Greek growth exceeds currently expected levels. The bonds will be issued under English law. Investors who do not accept the voluntary agreement might be forced to participate. The Greek government has announced this morning that it will introduce Collective Action Clauses (CACs) into Greek law. This gives the Greek government the possibility to impose the terms of the PSI agreement negotiated by the IIF and the Greek government on all private investors. This is almost certain to happen if the participation rate in the voluntary PSI isn’t sufficiently high, i.e. well above 80%. The Greek government might aim to avoid harming Greeks who have put their pension savings into government bonds. Therefore, bond portfolios of less than EUR100,000 that have been held by the same investor for a long time will probably be exempt. We do not know the cut-off data for exemption. It could be 1 January 2012 or 21 July 2011, when the PSI was initially announced (with a 21% haircut).

Debt sustainability achieved - or not
Our projections show that debt sustainability can be achieved after PSI if Greece delivers on its part of the deal and growth returns to the economy. Unfortunately, Greece has a poor track record with regard to reform implementation. In addition, the leader of the ‘New Democracy’, Samaras, who might become prime minister after elections, is far from eager to deliver the agreed austerity measures. To help Greece with reform implementation, the country will get a permanent and enhanced representation of experts in Athens. This could be seen as a helping hand to bring the country back on track, but in
Athens it is more likely to be seen as an invasion. The risk of a backlash after the April elections is thus very real. But for now we think that a disorderly default on 20 March has been avoided, though the national ratification process may cause some minor hiccups. After the PSI, the nominal value of private holdings of Greek sovereign bonds will be modest and the focus on Greece should fade.