The successful conclusion last Friday of the PSI (Private Sector Involvement), the bond exchange process for Greece’s private creditors, was good news—both for the country and for the eurozone. Voluntary participation in the deal reached 85.8 percent (out of a total of 206 billion euros in Greek government bonds which were up for exchange). The level of participation reached 95.7 percent with the decision to activate the Collective Action Clauses (CAC) recently added to the legal contracts governing 177 billion euros of bonds under Greek law, forcing recalcitrant creditors to participate in the process. This means a 105 billion euro gross reduction in Greek debt—out of a total of 368 billion.
This number, which makes Greece’s sovereign debt restructuring the largest in history, should rise further once the process for the holders of Greek government bonds under foreign law is concluded. The government bondholders represent about 10 percent of the 206 billion euro total, and almost 70 percent of them have already declared their participation. The Greek government has given the rest until March 23 to fall in line, stating unequivocally that no hold-outs (that means you, distressed-debt funds) will be paid above what the terms of the PSI offer— a nominal loss of 53.5 percent and a Net Present Value Loss of around 75 percent.
The PSI deal opened the way for the final approval of Greece’s second European Union-International Monetary Fund bailout—worth 130 billion euros—which the Eurogroup gave the official green light to yesterday. The IMF is set to meet on Thursday to discuss managing director Christine Lagarde’s proposal to contribute 28 billion euros to the new bailout—a figure that far exceeds expectations of what the Fund would offer. In addition, the European Central Bank announced it would begin accepting Greek government bonds (the new ones) as collateral to provide liquidity to Greek banks—before the bond exchange was finalized last Thursday—without setting minimum credit rating requirements. The ECB had temporarily stopped accepting Greek bonds as collateral on February 28th, after S&P downgraded Greece to a “selective default” rating.
The immediate benefit of the restructuring for Greece—aside from the debt relief—is that it removes the specter of disorderly default and an exit from the Eurozone—at least in the short-to-medium-run. These scenarios would be catastrophic for the country and a destabilizing factor of major destructive force for the European economy. Escaping this fate, aside from being wholly desirable in itself, is also a necessary condition for confidence to return and investors to start putting their money back in Greece.
But, huge challenges still remain. To begin with, the net debt reduction from the deal is much smaller than the 105 billion euros mentioned above, because of the new lending needed for the bond exchange to go through (30 billion euros as credit sweeteners for private creditors, 5.7 billion in accrued interest on the bonds being exchanged, and up to 50 billion to recapitalize Greek banks, whose balance sheets were pummeled by the exchange). According to the latest projections, Greece’s debt, post-PSI, is expected to fall by 2020 to 117 percent of GDP—a ratio considerably better than the current eye-watering level of 171.5 per cent, but a long way from low. And this, of course, provided there are no accidents on the way.
Of these there could be plenty. The latest figures put unemployment in Greece at 21 percent, including a calamitous 51.1 percent for young people (aged 15-24). The Greek economy contracted by nearly 7 percent in 2011 and is forecast to shrink by a further 4-5 percent this year— its fifth straight year in recession. The latest wave of austerity included severe cuts to wages, benefits, and pensions, both in the private and the public sector. With more cuts on the immediate horizon—they must be agreed by June—and no growth in sight, Greeks are becoming desperate.
Early elections, widely expected to be held at the end of April or early May, will provide an opportunity for the public to vent its rage at a political system that badly let them down. The two main parties, the socialist PASOK and the conservative Nea Democratia—which leads in the polls—support the new austerity measures as necessary for the country to remain in the euro. Given the level of corruption and incompetence that has marked their rule—and the constant reminders that they are still stuck in the old ways—this rather discredits the new adjustment program in the eyes of voters.
Many of them will turn instead to the hard Left, which rejects the new austerity program and either flirts with (SYRIZA) or openly embraces (the Stalinist KKE) a return to the drachma. If we add to them the Democratic Left—an offshoot of SYRIZA whose claim to be a more responsible, pro-European political player has so far failed to translate itself into concrete acts—more than a third of all seats in the new parliament could be in the hands of parties that reject the new loan agreement.
On the other hand, there is a growing clamor in the far-right end of the spectrum. The populist right-wing LAOS, which supported the coalition government until recently, has now withdrawn its support and is raising the nationalist pitch of its rhetoric in order to shore up its confused base. It will compete for disgruntled right-wingers’ votes with the “Independent Greeks,” a new party started by a rabble-rousing former deputy of Nea Democratia who refused to back the new round of austerity measures, and “Chrysi Augi,” a violently xenophobic, neo-fascist organization which some polls place close to the 3 percent threshold needed for parliamentary representation.
Even if the election delivers a pro-European, Nea Democratia-PASOK coalition, the pressure on the new government will be immense from day one. The Europeans will demand full implementation of the draconian measures adopted in February and the new ones to be agreed in June. Meanwhile, the people, jobless and increasingly impoverished, will push with growing ferocity in the opposite direction.
That is the real reason why the new Greek government bonds, which started trading yesterday, have bankruptcy-high yields. Investors expect more distress. They do not believe the Greek government can push through painful reform in a climate of economic depression. It is up to Greek politicians, and society, to prove them wrong, with the help of European know-how and investment. It will be a long and grinding road. But Greece has at least bought itself a chance to travel it.
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