Photo: AP/Nikolas Glakoumidis
Greece is on the brink of receiving its second bailout, and in case you haven’t been following every headline, we wanted to provide a little background on what’s going on.Under the current bailout plan, private sector holders of Greek bonds are expected to participate in a “bond swap,” where they’ll exchange their existing bonds for new ones with longer maturities and lower face values. This amounts to a debt restructuring—a “selective [or controlled] default”—through which the country means to reduce its massive public debts by more than €100 billion ($131 billion).
In order to make this happen, however, Greece has to get these creditors to participate in the deal. It can do that in two different ways.
1) Last month, the government passed a law saying that if 66.67% of bondholders agreed to swap their bonds voluntarily, then it could bind the remaining third of its creditors to the deal against their will using collective action clauses (CACs). This would likely trigger insurance payments on Greek bonds (credit default swaps) as a “credit event.” Hedge funds and speculators who purchased these bonds at distressed values want this to happen, as they would get back the money they spent (and maybe more) to purchase those bonds in the first place.
2) If 90 per cent of Greek bondholders decided to participate, Greece would probably not activate the CACs and not provoke a credit event.
Greece has said that its lower bound for going through with the deal would be 75 per cent approval of the swap, but statements recently indicate that it might go through with the bond swap if it received just 2/3 approval.
In either of these cases, the country will receive €130 billion ($171 billion) in loaned aid from the “troika”—the European Central Bank, the European Union (i.e. individual countries), and the International Monetary Fund.
While Greece won’t have to pay back this money for a long time and at low interest rates, the fact that it is still responsible for these debts means that the country’s debt burden won’t actually be sustainable anytime soon. In fact, even by the most optimistic assumptions, Greece’s debt-to-GDP ratio won’t fall below 100% until 2020.
There is, however, a third scenario here—complete failure of the bailout deal:
3) An insufficient number of Greek bondholders go through with the bond swap (Greece has said less than 75% but analysts are thinking 66.67%). Greece can’t activate the CACs and the troika probably won’t pay out its aid money. Thus Greece will not be able to pay off €14.4 billion ($18.9 billion) in debts maturing on March 20.
This last possibility, though unlikely, is still very real. This would constitute a “hard” or “disorderly” default, and many analysts predict that this would necessitate Greece’s leaving the euro.
The Greek government will know what percentage of its private creditors will participate in the deal tomorrow at 3 PM EST. Most analysts expect outcome #1—between 75 and 90 per cent of bondholders will participate—but we won’t know the outcome until tomorrow at the earliest.