ATHENS – After stiffing private investors for 74 percent losses earlier this year on their holdings in Greek bonds, Greece may also give a so-called “haircut” of 30 percent losses to the European Central Bank (ECB) and the 16 other countries in the Eurozone who are helping with bailouts.
The Reuters news agency reported that European Union (EU) leaders are looking at another debt restructuring for Greece, which wrote down $134 billion in debt earlier this year by imposing losses on investors, effectively locking itself out of the private markets and dependent on welfare aid from the Troika of the EU-International Monetary Fund-ECB which put up $152 billion in a first series of rescue loans but is withholding a second for $173 billion until the new coalition government of Prime Minister Antonis Samaras imposes more austerity and makes another $15 billion in cuts.
The aim is to reduce Greece’s debt by another 70-100 billion euros, or $86.2-$123.1 billion, which would help the country reduce its debt load to 100 percent of the annual Gross Domestic Product, instead of more than 120 percent as projected. The deal would mean that governments and taxpayers in the other 16 Eurozone countries would have to pick up part of the tab for alternating New Democracy Conservative and PASOK Socialist governments piling up $460 billion in debt by packing public payrolls with hundreds of thousands of unneeded workers for generation in return for votes and reward Greece’s profligacy.
Officials described a further restructuring of Greek debt as a last chance to restore the country to solvency, with the agreed goal of cutting its debt to 120% of GDP by 2020 already seen as far beyond reach, the report says. “It is very complicated and the precise method has not been decided yet because it is very early days,” one source told Reuters.
EU banking officials reportedly said there is literally no chance Greece can meet any of its goals despite increased Troika demands to make more reforms and make more cuts. Troika inspectors were in Athens to meet with Samaras, who has gone back and forth over whether he would ask them to renegotiate some of the terms but now said while he will follow their orders that Greece needs at least two more years to comply.
Greece earlier this year put forth a mandatory Private Sector Involvement (PSI) program on private investors and this new scheme is being called Official Sector Involvement (OSI) but has the same goal for Greece’s lenders of last resort. “If I were to assign a percentage chance to OSI in Greece happening, I would say 70 percent,” one euro zone official involved in the deliberations told Reuters. “It is very complicated and the precise method has not been decided yet because it is very early days,” one source said.
Politically it may be easier for policymakers to get the ECB and national central banks to take a hit on their bond holdings, rather than euro zone governments which would mean that taxpayers will suffer direct losses. However, the process would still come with complications. First of all, several national central banks would probably have to be recapitalized, officials said.
Two officials indicated that the French, Maltese and Cypriot central banks were most exposed to Greek government debt and would probably need a capital injection. Two other officials said the ECB could also need balance sheet support. “The preference is that the OSI would happen on ECB books,” one of the sources said. “The ECB would have to be recapitalized as a result, but that would be politically much more acceptable than a loss for taxpayers.”
(Sources: Reuters, Bloomberg, Nasdaq)