The com­ing Greek debt restruc­tur­ing;

Financial Mirror (Cyprus) - - FRONT PAGE -

In the event of a Greek de­par­ture from the Eu­ro­zone, a de­fault on both of­fi­cial sec­tor debt and debt held by the pri­vate sec­tor would very likely oc­cur. For the fore­see­able fu­ture, a more likely out­come is that Greece re­mains in the Eu­ro­zone. The re­cent ten­ta­tive agree­ment be­tween Greece and its in­ter­na­tional cred­i­tors to ne­go­ti­ate a third fi­nan­cial sup­port pro­gramme, makes it more likely that in the near term Greece will avert the adop­tion of a new cur­rency to re­place the Euro. How­ever, for the pro­gramme to work, some debt restruc­tur­ing ap­pears nec­es­sary.

The aim of the pro­gramme is to re­store fis­cal sus­tain­abil­ity, fi­nan­cial sta­bil­ity and long-term growth, and bol­ster mar­ket con­fi­dence, so that Greece can re­turn to the pri­vate cap­i­tal mar­kets to meet its fund­ing needs. Im­por­tantly, a re­cov­ery is needed to re­store macroe­co­nomic sta­bil­ity. If the econ­omy does not re­cover, the debt bur­den will in­evitably con­tinue to in­crease. The Greek Par­lia­ment has al­ready ap­proved two rounds of fis­cal, leg­isla­tive and struc­tural mea­sures re­quired by the cred­i­tors. In re­turn, re­cent in­terim fi­nan­cial sup­port from the Euro­pean Sta­bil­ity Mech­a­nism (ESM) and Euro­pean Fi­nan­cial Sta­bil­i­sa­tion Mech­a­nism (EFSM) has al­lowed Greek banks to re­open, some cap­i­tal con­trols to be re­laxed, Greece to re­pay the ECB and to clear its ar­rears to the IMF.

As the terms of the three-year EUR 82-86 bln ESM loan fa­cil­ity are be­ing de­bated, some form of debt restruc­tur­ing is also be­ing con­sid­ered. If a restruc­tur­ing oc­curs, it would likely only in­volve of­fi­cial sec­tor loans. This con­trasts with the 2012 restruc­tur­ing, which in­cluded both hair­cuts on pri­vate bonds and the ex­ten­sion of ma­tu­ri­ties and de­fer­ral of in­ter­est on of­fi­cial sec­tor debt. So far, the de­sign of a sec­ond restruc­tur­ing has yet to be de­ter­mined. Nev­er­the­less, there are three rea­sons to ex­pect a restruc­tur­ing to be forth­com­ing.

1. The debt bur­den is un­sus­tain­able

DBRS shares the widely held view that Greece’s debt bur­den is un­sus­tain­able. This is as much a func­tion of low growth prospects as it is of debt ser­vice pay­ments: with­out a re­turn to sus­tain­able growth Greece’s debt bur­den will only in­crease. The dam­age to the econ­omy af­ter six months of ne­go­ti­a­tions, two missed pay­ments to the IMF, three weeks of cap­i­tal con­trols, a pop­u­lar ref­er­en­dum, and an abrupt ac­cep­tance by Greek ne­go­tia­tors of deep ad­just­ment mea­sures has been sig­nif­i­cant.

GDP is ex­pected to de­cline this year be­tween -1.0% and - 4.0%. The ex­tent of the de­te­ri­o­ra­tion will likely de­pend on the ef­fect of cap­i­tal con­trols on con­sump­tion and in­vest­ment, and the im­pact of the ex­pen­di­ture cuts and tax in­creases that Greece must im­ple­ment as part of the com­ing pro­gramme.

The IMF es­ti­mates that even with full im­ple­men­ta­tion of struc­tural re­forms, as out­lined in the July 12 ‘prior ac­tions’, Greece’s real long-term growth rate will be only 1.5%. Over the medium term, GDP is ex­pected at 2% to 3% as the out­put gap closes and con­fi­dence is re­stored. Re­gard­ing debt ser­vice, even if the pro­gramme is fully im­ple­mented, the IMF ex­pects fi­nanc­ing needs through the end of 2018 to be EUR 85 bln, well above the 15% of GDP thresh­old deemed safe. Un­der this frame­work, even if growth re­sumes, public debt is ex­pected to peak at close to 200% of GDP in mid2017, up from an al­ready high 168.8% of GDP in the first quar­ter of 2015.

2. IMF restruc­tur­ing

par­tic­i­pa­tion

is

con­di­tional

on

debt

On July 30, IMF staff in­formed the IMF board that Greece is dis­qual­i­fied from a third IMF pro­gramme. The dis­qual­i­fi­ca­tion was be­cause in their view the debt is un­sus­tain­able, and be­cause Greece has a poor record of re­form im­ple­men­ta­tion. The IMF staff doubts that the ex­ist­ing loan fa­cil­ity for Greece, of which there re­mains EUR 16.5 bln to dis­burse, will achieve its orig­i­nal tar­gets, or al­low Greece to re­turn to the pri­vate cap­i­tal mar­kets by March 2016, when the pro­gramme ex­pires. There­fore, the IMF will not ex­tend any new loans un­der a new pro­gramme un­less it deems Greece’s debt bur­den to be sus­tain­able “with a high prob­a­bil­ity.” This de­ci­sion is im­por­tant be­cause both the EU and ECB have ex­pressed a lack of will­ing­ness to ex­tend a new sup­port pro­gramme to Greece un­less the IMF is in­volved.

In its most re­cent debt sus­tain­abil­ity anal­y­sis, the IMF

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