Greece’s private creditors should really stop complaining about an upcoming bond swap, argues economist Nouriel Roubini in a column published today in the FT.
Greece’s creditors have been miffed about swapping their old bonds for new ones with a lower face value and longer maturity as part of a selective default meant to reduce the country’s debt burden.
But Roubini suggests that such thinking is narrow-minded. Not only do the sweeteners actually increase the value of creditors’ current debt holdings, but the official sector will be forced to bear the burden of inevitable future restructurings. Therefore, they should really see that they “are the lucky ones” in this economic tragedy.
Roubini details a handful of reasons why Greek bondholders should really count their lucky stars:
- The plan will include €30 billion ($39 billion) for upfront cash sweeteners on the new bonds, a guarantee that they will still be valuable.
- New bonds will be issued under English law, not Greek law, so the Greek government won’t be able to convert euro-denominated debt into new drachma debt if the country leaves the euro.
- Greece’s official creditors have long been restructuring, extending maturities on loans to Greece and forgiving some of the interest they were owed, so they really shouldn’t be considered “preferred lenders.”
- Greece’s public debts are unlikely to become sustainable anytime soon, and the country will probably have a hard time repaying the €130 billion ($171 billion) in additional loans it’s about to receive from the EU/ECB/IMF troika.
But most importantly, the private sector should by no means be jealous of the terms the official sector is getting in this plan:
In conclusion, the idea that Greece’s debt restructuring is all PSI and haircuts, with no official sector involvement, is a myth. OSI started well before PSI; the PSI deal has substantial sweeteners; and with three quarters of Greek debt in the hands of official creditors by 2014, Greece’s public debt will be almost entirely socialised. Official creditors will be left to suffer most of the huge additional losses that remain likely on Greece’s still unsustainable debt in future. Moreover, the second official sector rescue of Greece will not be the last. Greece will not regain market access for at least another decade; so its fiscal and current account deficits will have to be financed with additional official resources for the foreseeable future.
So, Greece’s private creditors should stop complaining and accept the deal offered to them this week. They will take some losses, but those losses are limited and, on a mark-to-market basis, the debt exchange offers them a potential capital gain. Indeed, the fact that the new bonds are expected to be worth more than the old bonds suggests that this PSI exercise has further transferred losses to Greece’s official creditors.