By Charles Forelle
It also produced a bevy of numbers. That’s a welcome departure from the vague puffery-packed declarations we usually get. But unfortunately many of the figures aren’t clearly explained. We’ll try to fill that gap as best as we can, with updates during the day as we learn more.
UPDATE: Here’s much more.
Bottom line, we estimate that the private sector’s losses on bond principal will, on its own, reduce Greece’s debt stock by around 7% of its expected 2020 size. The fact that the private sector will be lending to Greece at rates below what it would be expected to get on its own in markets will contribute a reduction of more than 10%.
All in, as a very rough guess, the “PSI” portion of the deal means Greece’s debt will be one-fifth lower in 2020 than it otherwise would have been.
Let’s back up.
First, the €109 billion in new financing from the EU and IMF through 2014 is wholly new money. It comes on top of the €110 billion bailout package created last year, from which €65 billion has been disbursed. The remaining €45 billion will be disbursed in addition to the €109 billion.
Second, the €109 billion appears, according to one document we saw, to include €20 billion for Greece to buy back its own debt on secondary markets at a discount. (More on that later.)
Now for the really confusing stuff: Private-sector involvement.
There are two pieces of private-sector involvement. One, a debt exchange, involves creditors giving up their Greek bonds and accepting new ones that mature 15 or 30 years hence. The other, a buy back, involves lending money to Greece to buy back its own debt at distressed prices. The difference between the face value of the debt and the lower price is a reduction in Greece’s debt stock, at the expense of private investors who sold at a loss.
OK, the numbers: The euro-zone statement says the “net contribution” of the private sector will be €37 billion between 2011 and 2014, and €106 billion from 2011-2019.
What’s that mean? We assume it refers only to the bond exchange.
The “net” piece refers to the cost of a “credit enhancement” that the euro-zone will have to provide to the private sector in the course of the exchange. A clue comes from the statement by the Institute of International Finance, the bank lobby group that has been negotiating with governments.
That statement calls the “contributions” in the bond exchange €54 billion between 2011 and 2014, and €135 billion through 2020. Those numbers are not net of anything.
It seems clear from the IIF statement that “contribution” refers simply to the volume of debt that private creditors will agree to exchange in the program. It does not mean that private creditors will suffer losses of €37 billion or €54 billion (or €106 billion or €135 billion in the longer term). Nor does it mean that Greece will see its private-sector debt reduced by that amount. It’ll be reduced by much, much less, in fact.
The IIF presents four options for debt exchange, and assumes that each option is taken up by 25% of the holders. Two of the options include a 20% discount to face value in the exchange; two include no discount. In other words, in the first two, the holder of a €100 bond would get a new €80 bond maturing in 30 years. (As compensation, he’ll get a higher interest rate than the holder who takes a new €100 bond maturing in 30 years.)
So half of the exchanged debt will take a 20% face-value haircut, or an average 10% haircut. Applied across the €135 billion the IIF says will be “contributed,” that means a €13.5 billion reduction in the volume of Greece’s debt. Which jibes with the figure at the bottom of the first page of the IIF’s statement.
IMF data indicate that Greece’s debt load in 2020 will be 130% of GDP (under old assumptions that predate the new deal). We figure Greece’s GDP to be around €300 billion in 2020, for a volume of €390 billion. Against that, a €13.5 billion reduction doesn’t look like much.
Then there’s the debt buyback. The euro-zone statement says €12.6 billion will be reduced from Greece’s debt stock through the buybacks. We’re not sure precisely where the money for buybacks will come from. The €20 billion we mentioned above in official financing for buybacks may not be enough a €12.6 billion cut. If you could buy €32.6 billion in debt for €20 billion–to get a €12.6 billion cut–it would mean Greek paper could be had for 61 cents on the dollar. That may be too low an assumed price, especially for shorter-dated paper and particularly if markets know a big fresh buyer is coming in.
An earlier draft we saw of the IIF offer included discussion of €40 billion for buy backs, including money from non-European sources. Perhaps the €12.6 billion reduction is based on spending an amount in that range. More details will have to come on this.
In any case, adding the €12.6 billion projected to be garnered from buybacks to the €13.5 billion from the debt exchange, we can see that the plan contemplates €26.1 billion in reduction to Greece’s debt by 2020. That’s a cut of 7% to the total estimated stock. It’s far from huge.
An important point: The IMF estimate of around €390 billion in debt in 2020 is based on Greece’s needing to refinance in markets at elevated costs in later years. That need is obviated in part by the exchange. The IMF projects a steady rise in Greece’s average interest rates to 6.7% by 2020, from 4.6% currently.
The IIF debt exchange plan has an average interest rate of 5.38%; if we assume that instead of rising to 6.7%, Greece’s average rate rises to 5.4%, more than €40 billion (more than 10% of the stock) is shaved off by our calculations.
A final important point: The reduction in the EU’s own official lending rate to Greece will also contain interest costs and thus the growth in Greece’s debt.
These are rough estimates based on an incomplete picture of what’s on the table. Comments, clarifications and corrections welcome.
Follow @charlesforelle on Twitter.
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