Two year escape hatch

IMF Chief Economist Olivier Blanchard in a new blog post defending the 2010 Greece program against various criticisms, including the absence of debt restructuring —

Moreover, private creditors were not off the hook, and, in 2012, debt was substantially reduced: The 2012 private sector involvement (PSI) operation led to a haircut of more than 50% on about €200 billion of privately held debt, so leading to a decrease in debt of over €100 billion (to be concrete, a reduction of debt of 10,000 euros per Greek citizen). And the shift from private to official creditors came with much better terms, namely below market rates and long maturities.

Below the fold, a few relevant sentences from the IMF’s own ex-post evaluation of the 2010 Greece program, issued in 2013. Bottom line: what could be achieved in 2012 was severely constrained by what was (not) done in 2010, and the 2012 restructuring destroyed a core assumption of the 2010 program. In particular, when debt restructuring [private sector involvement (PSI)] was done, the hit on the remaining private sector creditors, including Greek banks, had to be larger because other private creditors were gone and official creditors that had taken on their debt, including the ECB, were off the table in the restructuring. It was then much harder for Greece to return to the market as the 2010 program had assumed, and the banks needed a lot more money to recapitalize.

Private creditors were able to significantly reduce their exposure. Non-resident holdings of government debt dropped sharply in 2010–12. Resident holdings of government debt
initially rose, but then started to fall as well. There was a large-scale substitution from
privately-held to publicly-held debt. Part of this was by design?program financing was to be used to repay maturing bonds in 2010 and 2011?but the shift was intensified by market access not being regained in 2012, as well as by SMP [ECB’s securities markets program]. Purchases of Greek government bonds under SMP created rigidities when debt was restructured as a result of the decision to exclude SMP (and euro area national central bank) bond holdings from the PSI …

The adequacy of the program financing required favorable assumptions. Markets were concerned about the problem of large repayment obligations in 2014 and 2015 after the program expired. The financing strategy assumed renewed market access from 2012 yet the composition of debt holders would now deter private lenders since official lenders tend to be senior creditors. Subsequent research also suggests that the market access assumption, assessed in terms of rollover rates, was sanguine compared to past experience in emerging markets facing exogenous shocks (see IMF, 2011). However, Greece’s advanced economy status and its membership of the euro area may have been considered as modifying factors ….

Nonetheless, many commentators considered debt restructuring to be inevitable.
With debt restructuring off the table, Greece faced two alternatives: default immediately, or
move ahead as if debt restructuring could be avoided. The latter strategy was adopted, but in the event, this only served to delay debt restructuring and allowed many private creditors to escape.

… In fact, many observers at the time considered that the Greek program would not stave off debt rescheduling or a default. Commentators noted that the level of public debt would remain high and would be aggravated by the severe recession, while the nonconcessionary interest rates on official debt worsened the debt dynamics. ….

A delayed debt restructuring also provided a window for private creditors to reduce exposures and shift debt into official hands. As seen earlier, this shift occurred on a significant scale and limited the bail-in of creditors when PSI eventually took place, leaving taxpayers and the official sector on the hook … Earlier debt restructuring could have eased the burden of adjustment on Greece and contributed to a less dramatic contraction in output. The delay provided a window for private creditors to reduce exposures and shift debt into official hands. This shift occurred on a significant scale and left the official sector on the hook.


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