Sunday, April 25, 2010

Thinking through a Greek debt restructuring

The NYT website has a new story today about the increasing risk of a Greek debt restructuring, with opinions about how it would work.

Carl Weinberg of High Frequency Economics proposes converting all Greek bonds due until 2019 into a pool that would be refinanced with 25-year bonds. Assuming a 4.5 percent interest rate, this plan would cut Greek financing requirements by some 60 percent, or €140 billion, he estimates.

Daniel Gros of the Center for European Policy Studies has proposesd extending the maturity of existing notes by five years, at the same interest rate. In other words, a 5-year bond paying 6 percent annual interest would become a 10-year bond, still paying 6 percent interest.

I think something along these lines is inevitable due to the arithmetic of Greece's debt maturities. However, a rescheduling would mean that Greece would lose market access and would have to balanced its budget immediately (aside from any credit provided by the EU and the IMF).

Banks holding rescheduled bonds would have to mark them to market unless provided with accounting forbearance which is very unlikely.

An interesting question is how the ECB would treat the billions in Greek bonds that it holds as collateral against loans to (mostly Greek) banks. It would like as though the ECB could take some big losses on these bonds, because the banks won't be able to repay the loans.

How would these rescheduled bonds be rated? Presumably at the bottom of the scale.

This could be bigger than Lehman. Head for the hills!

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