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CAPITAL MARKETS

Sovereign debt: Greece was the first to restructure but might not be the last

As Euromoney went to press, the bailout deal agreed by European heads of state for Greece on July 21 looked at risk of unravelling over a squabble arising from other countries, including Austria and the Netherlands, objecting to the private side deal by which Finland had appeared to extract from Greece cash collateral to be put against its share of commitments.

Greek Prime Minister George Papandreou 

George Papandreou: Greece got a sweet deal. What about the others?

It’s a dilemma. When one country gets a sweeter deal, do others object to it on principle, complain about others breaking ranks... or seek the same advantageous terms for themselves?

The dilemma now faces some other countries over whether or not to seek the same kind of debt forgiveness that Greece now looks set to receive. The Greek deal marks a new phase of the sovereign debt crisis. Not only have official-sector creditors granted it softer terms, including longer maturities and lower interest rates, but banks and other private-sector investors have agreed to the same, albeit with collateral protecting principal exposures. They have accepted a loss of net present value on their holdings of Greek debt equivalent to 21%, assuming the deal goes through as envisaged when it was struck at the end of July.

Will other countries now seek the same? That’s the pattern veteran debt negotiators recall in Latin America 25 years ago. If Mexico got some concession from creditors, Brazil would be along to ask for the same.

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