Communication for Sustainable Development

Greek Sustainability Needs More Investor Losses, Troika Says

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Bondholders will need to take deeper losses on Greek holdings to make the country’s debt sustainable, according to a report on the country’s finances by international creditors.

The financial situation in Greece “has taken a turn for the worse” since the last review in June, said the report of the so-called troika dated today. The previous assessment led to a July agreement that called for investors to take a 21 percent reduction in their holdings’ net present value.

European officials are now considering options with writedowns of as much as 50 percent. Euro-region leaders awaited the troika’s findings as the basis for negotiating deeper investor involvement in reducing Greek debt, an aide to German Chancellor Angela Merkel told reporters today in Berlin.

Germany wants a voluntary agreement with banks by an Oct. 26 summit, the second of two leaders’ meetings in four days, the official said, speaking on terms of anonymity in line with government rules.

“Large, long-term, and sufficiently generous official support will be necessary for Greece to remain current on its debt service payments and to facilitate a declining debt trajectory,” said the report.

The assessment by the European Central Bank, the International Monetary Fund and the European Commission, obtained by Bloomberg News, said more government aid will be needed and deeper private-sector involvement, or PSI, as is now being considered by European leaders, “also has a vital role in establishing the sustainability of Greece’s debt,” it said.

Debt Load

Giving scenarios using discount bonds with an assumed yield of 6 percent and no collateral, Greek debt can be brought to just above 120 percent of gross domestic product by the end of 2020 if 50 percent discounts are applied.

“Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros ($158 billion),” it said. “To get the debt down further would require a larger private sector contribution” of at least 60 percent to reduce debt below 110 percent of GDP by 2020.

The European Central Bank was opposed to inclusion of the bond-loss scenarios in the report, according to a footnote in the report.

Banks are resisting taking losses deeper than those agreed to in July. Among swaps being considered by EU officials now is one with no collateral of any kind.

Swap Options

Other plans involve an exchange with a 50 percent reduction in net present value, or upfront bond exchanges into either AAA rated bonds from the European Financial Stability Facility or new 30-year Greek government debt, according to people familiar with the matter. Upfront exchanges could involve a 50 percent discount off face value.

Creditors’ participation needs to remain voluntary, Austrian Finance Minister Maria Fekter told reporters Oct. 18. “A forced restructuring means default, in which credit default swaps are triggered, and that means billions around the world that have to be financed,” she said. “Everybody wants to avoid that.”

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