THE GREEK private sector involvement (PSI) plan, the process under which banks and other bondholders will take losses, last night claimed sufficient take-up for collective action clauses (CAC) to be triggered, which would force all holders of Greek law bonds into the restructuring plan. If CACs are triggered this morning, where does this leave Greece?
The answer is, unfortunately, not in a much better position. Firstly, even with the use of CACs, Greece may still not be able to get the level of participation in its restructuring (95 per cent) which it needs to meet even the EU/IMF/ECB troika’s incredibly optimistic path for debt sustainability. This is because there could still be some holdouts by owners of Greek bonds issued under foreign law – an issue which will not be settled for another month. Furthermore, the Greek banking sector will need to be recapitalised since its capital base, consisting largely of Greek bonds, will be depleted. The troika publicly says this will cost €23bn (£19.3bn). However, our estimates, and those in a recently-leaked troika debt sustainability analysis (DSA), put the figure closer to €50bn. After this deal, questions over the health of the Greek banking sector will abound.
Most importantly though, even if the 95 per cent participation rate is met and the banks are returned to some semblance of stability, this is still a terrible deal for both Greece and Eurozone taxpayers. It has sown the seeds of a major political and economic crisis at the heart of Europe, further threatening the stability of the Eurozone.
This would, perhaps, have been acceptable were it not for one nagging detail: this plan will not save Greece.
Of the total €282.2bn currently on offer to rescue the stricken country – through the bailouts and various forms of ECB and central bank intervention – Greece will only receive €159.5bn, or 57 per cent. The rest will go to banks and other bondholders to cushion the blow of the complex PSI scheme. In fact, to gain the €100bn writedown from private bondholders, Greece will have to take on an additional €86bn in debt – giving a small amount of debt relief, most of which is spread well into the future. Following the restructuring, Greece’s debt-to-GDP ratio will still be 161 per cent, a reduction of only 2 per cent compared to current levels, and Athens will almost certainly continue to miss its debt and deficit targets over the next few years.
Under the proposals, the total level of budget cuts Greece is expected to undergo stands at 20 per cent of GDP by 2013. The cuts are deeper and faster than any country has attempted – successfully or otherwise – in living memory. For example, the extensive fiscal consolidation seen in Ireland during the 1980s and 1990s totalled 10.6 per cent. Unlike Ireland’s task, Greece does not have the option of currency devaluation, meaning that the whole adjustment burden will fall on the Greek population (via internal devaluation). The latest figures put total unemployment at 21 per cent, with youth unemployment at 51 per cent – that is before Greece has even come close to finishing its fiscal consolidation and structural reform. Further increases in unemployment are a certainty, but it is far from clear what the resulting negative social and economic impacts will be.
Looking at these figures, it is clear that Greece will inevitably need either another bailout or be forced to default on its outstanding debt. But here’s the kicker: in a few years’ time, there will barely be any banks or other bondholders left to foot the bill from a Greek default. It will fall almost entirely on taxpayers.
At the start of this year, 36 per cent of Greece’s debt was held by taxpayer-backed institutions (ECB, IMF, EFSF). By 2015, following the PSI and the second bailout, the share could increase to as much as 85 per cent, meaning that Greece’s debt will be overwhelmingly owned by Eurozone taxpayers.
These facts point to one painful conclusion: Europe is probably on course for a major political shock. Taxpayers in Germany, Finland and the Netherlands will not take kindly to having to pay (and see their debt and deficits increase), as Greek loan guarantees are turned into Greek losses. The Greek people will feel cheated that they suffered years of tough austerity only to see the country hit the iceberg anyway. This combination of ill-feeling and injustice will surely set the scene for another political and economic crisis which could run right to the core of the Eurozone.
This deal has, at best, just bought the Eurozone some more time. If it is ever to survive and prosper, from now on Eurozone leaders will have to use that time much more effectively.
Raoul Ruparel is the head of economic research for Open Europe.
This has sown the seeds of a major political and economic crisis in Europe