Nomura: A Bigger Greek Bond Haircut Is Actually A Really Good Idea

haircut

Photo: Robin Zebrowski on Flickr

Everyone’s going nuts about new rumours that the private sector is going to have to bear a lot more of the burden for Greece’s debt.Yesterday, we heard 40-60%, today we’re hearing 30-50%.

And Nomura’s Dimitris Drakopoulos says that’s probably not a bad idea.

While the short term effects of stronger PSI are scary, a bigger haircut will be the only way the debt swap makes a meaningful difference in the Greek sovereign debt crisis.

The July 21 deal for Greek Private Sector Involvement (PSI) via a bond swap is probably going to change.

The old deal won't work because...

- It doesn't provide immediate debt relief for Greece, and will actually increase gross debt at its inception.

- It only concerned for about half of Greece's debt.

- It doesn't really talk about what happens to private sector bondholders who don't participate.

The situation in Europe is deteriorating even faster than previously expected.

Lots of things have changed since July:

- The price of collateral in return for PSI in a debt exchange is now significantly higher. Greece will require about $13-20 billion more to fund the exchange.

- GDP growth has been revised downwards in a big way. We're talking -5.5% this year instead of -3.9% expected, and -2.5% in 2012 versus previous estimates of 0.6%.

- Greece is officially going to miss its deficit and privatization targets.

- Buybacks were planned for about 61%, and that doesn't look possible (Nomura thinks 40-50%).

So the PSI deal is probably going to change.

Nomura sees two alternatives to the current deal:

1. Along the lines of 40% haircut, $27.5 billion in debt buybacks, more coercive to private sector

2. Around a 60% haircut, $41 billion in debt buybacks, coercive to private sector

These are the kinds of results we can expect from each of those alternatives.

Coercion for private sector participation is going to be a key issue moving forward.

The trick is maximizing private sector involvement without requiring it, because mandatory participation could trigger a credit event.

Threats can and should be used. However, there is some risk that the private sector will call Greece's bluff and then Greece will be forced to go ahead with action that will indeed trigger a credit event.

Nomura favours a coercive debt exchange, mainly because it has a better chance of ensuring long-term debt relief.

Here's what Nomura thinks is going to happen.

- A bigger PSI deal is a better market alternative in the medium- to long-term, though it will have big negative impacts in the short run.

- A debt moratorium is still likely. Can anyone say...credit event?

- Domestic politics is probably going to be a big deal for Greece, particularly considering a big vote on austerity measures October 20.

Looking for a second opinion?

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