Eurozone officials have now agreed that there will be no restructuring of Greek debt, and that the country will receive new funds from the European Union, in addition to those from the IMF.Negotiations on this package are still ongoing, but it’s a near certainty that we will see some sort of second bailout secured by the end of June.
But why another bailout when everyone knows that the country can’t pay its bills?
The reason for the further kick of the can is that it pushes out the costly and dangerous restructuring event until 2013, when the European Stability Mechanism, or ESM, comes into play. That’s the successor program to the ad-hoc European Financial Stability Fund, that has thus far been used to support debt troubled states in Europe.
The reason leaders want to get Greece to the ESM stage is that it entails some sort of orderly restructuring of the country’s debt, where private creditors will take part in the deal. There is the potential that the ESM could swap its debt to creditors in exchange for the sovereign debt they are holding. Essentially, that’s a eurobond in exchange for a Greek bond, in everything but name. This has not yet been agreed to, and will likely garner significant political opposition.
In 2013, collective action clauses will be installed in the sovereign debt of member states. This will allow private bondholders to vote on what they will accept in exchange for their current debts. German Chancellor Merkel has expressed support for such measures, which will make it easier for eurozone leadership to discuss restructuring at the least, and debt replacement if eurobonds come into existence.
But here’s where it gets interesting. By 2013, most Greek debt won’t be owned by the private sector (banks, bond funds, individual investors), but rather the IMF and European Union.
So, if Greece gets to 2013, a restructuring event or eurobond swap would really just hurt the ECB, EU, and IMF, saving banks and private creditors the costs and the region contagion risks. Hence the desire to kick the can yet again, giving the rest of the eurozone more time to clean up its act, and the region’s banks a chance to further decrease their exposures.
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