Is stay-in the new bail-in?

It’s worth noting a flurry of Greece-related chatter coming into a quiet news cycle on New Year’s Eve.  The context: Greece has a 3 year stand-by arrangement from the IMF and a parallel arrangement with the EU, meaning that it gets the money over those 3 years, but has to repay fairly soon afterwards.  It’s easy to lapse into the Greek mythology to find a metaphor for the looming repayment schedule from 2014 onwards but suffice it to say that no one likes the look of it.  So for over a month, reports have circulated that a loan extension was close to a done deal — up to 11 years according to one report.

In their trademark mixture of dry and dramatic, here’s how the IMF staff report recommending the latest installment put it (para. 20)  —

The authorities recognized the need to eliminate lingering uncertainty about how high post-program amortization requirements will be handled. Reducing the required scale of amortization would likely allow an earlier restoration of market access on more reasonable terms. The authorities noted that once market operations resumed they would tailor the maturity and volume of new issuance to smooth the overall debt repayment profile. Still, the approach of the official sector would be crucial, and the authorities indicated that they would strongly welcome if resources from European partners and the Fund were provided with longer repayment periods. Management and staff intend to propose to the Executive Board a transformation of the current SBA into an EFF once understandings can be reached with the EU and European governments on a parallel extension of the maturity of their loans. This change would extend Greece’s repayment schedule from 5 years to 10 years.

One important sidenote here is that the Irish government has defended the seemingly high interest rate in its IMF/EU loan program on the ground that it’s already longer term than the Greece program and so has to carry a higher interest rate reflecting the term structure.   But if the terms for a Greece extension turn out to be different from what Ireland now has, the government — if it’s still in power — might have some explaining to do.

Anyway, back to Greece.  The Fund paragraph above refers only to the approach of the official sector.  But does it really stand to reason that the IMF and EU would extend the term of a loan while private lenders were getting to cash out over that extended duration?  So not surprising to see today

Greece is in talks with commercial banks on extending the repayment of its outstanding debt, in line with a similar plan to stretch out paying back its EU/IMF bailout, an Athens weekly* reported on Friday …  “The discussions on a parallel extension of the repayment period of the debt owed to the private sector are being conducted by … Lucas Papademos who has been making rounds between Berlin, Franfurt, London and Brussels recently,” the paper said without quoting any sources.  It said the plan for a mild restructuring calls for a repayment extension of 10 up to 30 years, with the focus on paper maturing in 2013 to 2015.

The key issue with a loan extension is the interest rate that would apply to it.  Now we can mention the so-called Abu Dhabi option which popped up in media discussion a little while back —

Daniel Gros, the head of the Center for European Policy Studies in Brussels, said that just as investors of Dubai World were required to share the pain in return for a rescue by Abu Dhabi, so should bondholders in Irish banks. “It was not easy, but in the end all the creditors accepted it,” Mr. Gros said.

The important point is that Dubai World restructuring did not involve any cuts in principal.  It was loan extension but at interest rates favourable to the debtor.  It’s still a write-down for the creditors but it’s less brutal than adjustment of principal.

Now, Greece’s private creditors are not necessarily looking at a Dubai World scenario.  But it’s possible that the polite request — backed up by Angela’s Merkel’s post 2013 mechanisms — is that they not all head for the exits too quickly after 2013.  Rather, that if the IMF and EU are going to leave money on the table till 2020 or 2021, it would be nice if they stuck around that long too.  Of course they may not like this.  It ties up money in a potentially high risk debtor and at interest rates that may not fully reflect the term and the risk.  But rather than requiring the existing investors to put up new cash — the bail-in — it asks them to stay where they are.  2011 will tell whether this is more palatable.  Perhaps the bigger question is whether is just further postpones the problem, not least because the total interest payments on the extended facilities will be much higher.

*The relevant Athens weekly appears to be this one, but our lack of Greek inhibits us from finding the story.

3 thoughts on “Is stay-in the new bail-in?

  1. That makes me ask. How much of the debt is covered by CDS and do they pay in case of an elongation?

  2. Restructuring of Greek debt is inevitable and the market has priced it in. The really worrying thing is that the ECB actions in the Spring were supposed to contain the contagion and isolate the problem to Greece. It hasn’t worked.

    I’ve done some calcs on how much some of the major countries need to cut back spending in order just to stabilise their debts. See here..

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