The Prodigal Greek

The Greek crisis through a different prism

Greece and the official sector, proposals from an Austrian banking veteran

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Here is a comment from Klaus Kastner on my last post regarding Greece and the need for an honest discussion between the Greek coalition government and the official sector given that majority of the country’s near term debt obligations are towards eurozone countries, the ECB and the IMF.

Klaus has extensive banking experience and I found his remarks just too good to be missed in the comments section of the blog, so I re-post here.

As much as one may disagree with certain technical, or the tactical, aspects of his suggestions, what is important in his comments is the wide range of solutions available to European leaders and institutions to change the current self-defeating course and reach a decisive and sustainable solution to the Greek debt problem without putting the country’s social cohesion and democratic institutions at risk.

Hope you enjoy reading it as much as I did:

“Regarding the general tone of this excellent article that Greece does not deserve to be punished more: to me, it is a testimony to the incompetence of the political leaders involved on both sides of the case that, from the beginning, one has talked about the issue in terms of crime & punishment. I have been involved in many restructurings. There were cases where my gut was longing so send the debtor to jail for having pulled fast ones on creditors. BUT: in a financial restructuring, there is simply no place for such – sometimes objectively very justified – emotions. Both sides are in trouble: the creditor because he might lose his money and the debtor because he might lose his existence. The only objective has to be how BOTH sides come out of it as little harmed as possible. A realization of that has been terribly missing in the case of Greece so far.

Let me just list a couple of instruments which are the most typical instruments applied in a financial restructuring and which have been terribly ignored in the case of Greece: variable interest rates tailored to the cash flow of the borrower; capitalization of interest when interest nominally due exceeds the borrower’s cash flow; a maturity schedule which makes sure that repayments do not need to be made until the restructuring is successfully completed (any “repayment” during a period of restructuring is a farce because, typically, the borrower needs to be lent new money in order to be able to make the repayment).

Some of the most natural instruments in a restructuring like a debt rescheduling with existing creditors or an Evergreen (or 99-year) Bond have been ignored. Even a default is nothing new in a debt restructuring and it is nothing bad as long as it is a consensual default. As the Chief Economist of Citibank said about a year ago: “The Europeans did not know that, outside Europe, debt reschedulings of sovereign debt with existing creditors have come a dime a dozen in recent decades” (remember that Russia was “bankrupt” as recently as 1998?).

Last but not least, a haircut was made when that is exactly the instrument which should NEVER be used in the case of sovereign debt after only a few years of crisis! If one had wanted to turn the general rules of a debt restructuring upside down, one couldn’t have done a better job!

It is totally wrong for Greece as the borrower to travel to Berlin/Paris with hat in hand and essentially beg for an extension of terms. In a restructuring, borrower and debtor have to operate at eye level; period! Greece would first have to do its homework (which the present government apparently has done), then work out a proposal which it deems acceptable to creditors and then present the proposal. And then Greece would have to say: “We have worked the numbers upside down. This is the most sensible solution we have come up with. It has advantages for us and advantages for you, and it has disadvantages for us and disadvantages for you. We need to agree on a compromise because neither you or us want something to hit the fan. And something will hit the fan if we don’t reach a compromise!”

It wouldn’t hurt at all if, when Greek political leaders make that case, they would surround themselves with some highly respectable experts in the field of sovereign debt restructurings.

One NEVER requests a “renegotiation” of an agreement only a few months old. One simply asks for a “minor amendment which has become necessary in light of recent events”. The creditors must never be put into a situation where they appear weak. The borrower must never be put into a situation where it has no choice.

The first thing to accomplish would be to lower the interest expense for Greece. A rate cut? No way! That would be perceived as another hardly defensible give-away on the part of the creditors (apart from the fact that Greece’s interest rate is already quite low). The solution is a capitalization of interest for a certain period of time (say 2 years initially). The creditors can say that they have not given in on the interest rate. The borrower has the advantage that no interest expense flows through the budget for at least 2 years.

Everyone seems to be expecting an OSI in the near future. Wrong! There would be a political uproar in the lending countries when tax payers are informed that they have to forgive Greece debt. Alternative? Well, take a sizeable chunk of Greece’s debt owed to public institutions, say 150 BEUR, which would be considered as unsustainable debt. Instead of forgiving it, convert it into a 99-year bond (see Mexico). The lending countries could tell their tax payers that “we have not forgiven Greece a single cent of their debt”. In practice, Greece would not have to pay any of that debt during the lifetime of today’s negotiators. Whether the ECB holds a 5-year Greek bond which cannot be paid or a 99-year Greek bond is a moot point (and perhaps an accounting issue, but the ECB does not do its accounting like a normal bank). The 99-year bond would initially trade at close to zero but, if Greece were to really make it in the next decades, its value could increase substantially. Probably never to 100% but certainly far above zero. And — the ECB would not forgive any legal claim against Greece which is a very important leverage.

I could go on and on. Instead, I enclose a post which I recently wrote about this subject.


Written by Yiannis Mouzakis

September 10, 2012 at 8:48 am

Posted in Economico, Politico

Tagged with , , ,

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