There is not enough sovereign debt forgiveness
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There is not enough sovereign debt forgiveness

The private sector needs a more realistic involvement and more debt forgiveness in the sovereign debt crisis

Private sector participants are urging governments to let them take more realistic losses from the sovereign debt crisis, after initially pushing to take haircuts on their Greek positions so as to restore debt sustainability.

For private-sector veterans of sovereign debt restructuring, the key question over the viability of the Greek offer is not if bondholders have been asked to take too big a hit but rather have they been asked to take too small a loss.

“The private sector has to get involved at a realistic level,” says a banker who has worked on several emerging market sovereign debt restructurings. He also seems unconvinced by the Greek deal. “There looks to be a lot of collateral in the proposed exchange and not enough debt forgiveness. There is no cookie-cutter approach to these things, but the politicians and the populations of debtor nations have to be able to see some light at the end of the tunnel and they have to feel some ownership for the programmes, rather than chafing at what has been imposed by outsiders, the EU, or the IMF and the banks. There’s a lot of austerity here but not much on increasing revenue.”

However, Charles Dallara, managing director of the Institute of International Finance (IIF) clearly hopes that the Greek offer will work.

“If we manage to achieve the proposed immediate debt reduction of €13.5 billion through the bond exchange programme and up to €20 billion including the debt buy-back, that will quickly bring the debt-to-GDP ratio down from 142% to 125% and then further reductions through primary surpluses should bring it to 120% by 2018 and put it on the path to 100% by 2020,” says Dallara. “That is even without growth any higher than current IMF forecasts. Remember this is a country that has very quickly reduced its annual budget deficit by 5% of GDP. If they do manage to increase revenues and bring in privatization receipts, that will change the dynamics of how the investor community views Greece.”

Financial market participants had been bracing themselves for a sovereign debt restructuring in the eurozone for 18 monthsbefore Greece’s bailout deal was agreed at a summit in late July. Europe’s fractured decision-making process is a worry.

While investors were pleased to see an announcement on July 21 of new powers for the European Financial Stability Facility (EFSF) to intervene directly in the markets for stressed sovereign bonds to forestall outbreaks of panic, this still requires the approval of national parliaments. As the IMF/World Bank meetings kick off in Washington, many eyes will be on a possibly tight ratification vote in Slovakia.

Now, with the Greece bailout deal offer in July, the IIF has publicly raised its head above the parapet as a principal negotiator in a tense and yet unresolved crisis that sees it dealing not only with Greece and bond investors but also other creditor governments and the IMF. These don’t want to lend money to Greece simply so that Greece can then repay its bondholders on time. The banks and investors get this rather better than the governments, it seems.

Dallara says: “When it became clear that private-sector involvement was needed, we discussed this potential role with the Greek prime minister and our own board but held off until July when we were approached by the eurozone deputy finance ministers’ group who asked what we thought would be needed to restore market access and to reach out to the investor community.”

It is a shame that private-sector lenders did not take a lead role much earlier in the Greek crisis.

When its bonds were trading around 80% of face value a year and a half ago, there might have been a time for Greece to offer to buy them back, capture some debt forgiveness and engage with creditors early on the need for structural reforms including privatization.

Meanwhile, as market participants look towards the seeming unravelling of the Greek debt crisis, on September 2 the European Commission, the ECB and the IMF said it was conducting its fifth review of Greece’s economic program.

“The mission has made good progress, but has temporarily left Athens to allow the authorities to complete technical work, among other things, related to the 2012 budget and growth-enhancing structural reforms. The mission expects to return to Athens by mid-September, when we expect the Greek authorities to have completed the technical work, to continue discussions on policies needed to complete the review,” says the joint statement.

For more on this subject, see Peter Lee’s full article in the September issue of Euromoney

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