A year ago, I blogged about the Buchheit and Gulati paper, How To Restructure Greek Debt. In contrast to the complete disinterest with which the downloading blogosphere greets attempts to promote my own papers, an exasperating cascade of SSRN downloads followed.
Savvy Loungers know that Greece did not, in fact, restructure. Instead, it concluded an agreement with the Eurozone member states, with the backing of the IMF, for access to a €110 billion facility that was judged at that time sufficient to repay all Greek public-sector debts maturing during the three-year IMF program period and to cover anticipated budget deficits during that period. The European Central Bank also embarked on a program of open market purchases of Greek and other Eurozone periphery debt and is thought now to own €40-50 billion of Greek sovereign bonds purchased in the secondary market. And last month, the Greek Finance Minister said publicly that even the €110 billion EU/IMF facility might not be enough to tide Greece over until 2013.
So what now? That is, in the words of Buchheit and Gulati, what are the possible endgame scenarios regarding Greek debt? According to Buchheit and Gulati there are three:
(i) Greece goes the distance with the current IMF/EU program and a debt restructuring is avoided altogether – Greece re-enters the public debt market in 2013 to refinance maturing debt and EU/IMF loans,
(ii) a debt restructuring of some kind becomes unavoidable after June 2013 when the EU’s “read my lips -- no restructuring until 2013” promise lapses by its terms, and
(iii) a liability management transaction [Lawyer-speak for “restructuring” IMHO, the authors’ linguistic gymnastics, notwithstanding – KDK] affecting some or all of the Greek debt stock is launched before 2013.
Buchheit and Gulati are irritatingly even-handed, at least superficially, in their treatment of the “go the distance” scenarios. For example, by their own account, the Greek public sector debt in 2013 will represent 150-170% of GDP and half of that debt will be held by official sector creditors (the EU, ECB, and IMF). At least one of these actors claims preferred creditor status for itself. And Greece will have just emerged from three years of IMF-imposed austerity measures that inhibit economic growth. And yet Greece is still able to retap the public debt markets in 2013 under Scenario One?
Of the post-2013 scenarios, Buchheit and Gulati envision three involving a restructuring of Greek debt and one involving Greece as a ward of the official sector for some indefinite period. Needless to say, the “ward of state” option would be unacceptable to Greece (and not too attractive to the official sector either). And any scenario involving an official sector hit (that is, the EU, ECB, and IMF, which will by that time own ½ to 2/3 of outstanding Greek debt) in order to repay commercial creditors is, according to the authors, nearly inconceivable. Thus leaving, in reality, only two post-2013 options, both of which entail costs and risks.
Thus, by their own terms, Buchheit and Gulati seem to suggest – without ever saying so -- that the pre-2013 restructuring scenarios are the ones that make the most sense. For the details of those proposals, read the whole paper here.
In the words of the inimitable Larry Solum, download it while it’s hot!
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