Photo: AP/Bernd Kammerer
On the same day that EU leaders finally struck a deal with bank representatives on private sector involvement in the Greek bailout, Greece’s new prime minister was actually speaking out against that very plan.In a column for VoxEU (via Faisal Islam), incoming PM Lucas Papademos argued that the costs of increasing the size of losses private bondholders will take on Greek bonds from the 21% agreed upon in July to 50% at stake now will probably do Greece more harm than good.
While a bigger haircut reduces the size of Greek debt, he argues, the financial implications of the move could be disastrous.
From the column:
Given the structure of the Greek sovereign debt by holder and the July PSI agreement, an increase in the haircut rate from about 20% to 50% could result in a reduction of Greek public debt by about €15-20 billion, that is by about 4-6%…it is doubtful that such additional debt relief would be achieved with the voluntary participation of the private sector, or would be assessed to be so; thus it could result in a sovereign default and a credit event.
And such a decision wouldn’t just harm Greece:
In addition to the implications of such an outcome for Greece as summarized above, its potential effects on bond yield spreads and CDS premia for other Eurozone countries that are perceived as fiscally vulnerable would lead to large – possibly huge – aggregate losses for financial institutions and the other holders of those countries’ sovereign debt.
We’re not sure what Papademos’s current feelings are towards the bond swap. However, if they haven’t changed in the past few weeks, then his dislike for the deal could spawn a fight between the Greek government and EU leaders over getting the terms of the bailout deal.
Greece must approve the terms and implement the economic reforms required by the October 26 bailout agreement to receive the next tranche of EU/ECB/IMF bailout aid. It needs that $11 billion by mid-December in order to stave off a disorderly default.