Bailout designers count on private investors to resume lending
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s the dust settles on Monday’s early-morning agreement to open talks on a third bailout for Greece, eurozone politicians’ circadian rhythms are returning to normal.
The country’s private bondholders, meanwhile, could be going back to a familiar sinking feeling.
With many of their bonds having already survived one writedown in a 2012 restructuring, a deal would leave them more reliant than ever before on the whims (and money) of Greece’s official lenders to avoid default.
Earlier this month, restructured bonds crashed to about 40 cents per euro of face value, and the market for them nearly evaporated, after capital controls and the bank holiday throttled the Greek economy.
That brought them down to the levels of Ukrainian bonds, whose issuer has been busy negotiating an actual restructuring over the same period.
As recently as a year ago this week, investors had been comfortable enough welcoming fresh three-year Greek debt back on to the market, at a coupon of just 3.4 per cent.
Now they have to ponder whether the effects of the near-Grexit experience leave future economic growth in a position to support their bonds.
“To be honest, I think the answer is no,” says Paul McNamara, emerging markets investment director at GAM.
ON THIS TOPIC
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“We had an unspectacular recovery, but it was a recovery, and Greece had market access,” Mr McNamara adds. The bank closures are likely to be an “absolute hammer-blow” on top of deterioration since last year.
It may also be that things cannot get much worse, and with relatively low debt-servicing costs for Greece after restructuring, even anaemic growth could boost bond values.
At the same time, the third bailout’s designers are counting on private investors to resume lending to Greece with gusto in the near future.
Of up to €86bn pencilled in for three years of funding, only €56bn to €66bn may come via official coffers. The remainder assumes privatisations and bond sales would fill the gap.
That gap is not as big as the more than €42bn that official lenders thought would flow back into the Greek bond market in three years during the first bailout in 2010. None materialised.
There is also a jumble in the relative standing of Greek creditors. This was worsened on Tuesday by Greece missing another payment to the IMF, the most senior of lenders to governments, while paying off a bond kept from 2012’s restructuring.
The restructured bonds’ share of Greece’s debt is small — at well under a fifth — and would probably shrink further over the third bailout.
Holders may be effectively (though not legally) subordinated to official lenders who will not write down their own debt. This has at least some historical echoes.
At some point on August 23, 1832 — according to a report the day after by The Times — an observer on Bishopsgate would have seen some agitated figures hurrying into the London Tavern, a City meeting place.
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Their haste was not just because of the cholera epidemic then plaguing the city. The figures were Greek bondholders.
They had heard distressing news about an official loan arranged by a troika — Britain, France and Russia — for Greece after its independence from the Ottoman Empire that year.
The investors might have welcomed fresh money, having bought £2.8m of bonds in 1824 and 1825 to finance Greek freedom fighters, who had soon squandered the funds and defaulted.
The new loan promised its holders “the first revenues of the state, in such manner that the actual receipts of the Greek treasury shall be devoted” to repayment, however.
That unpleasantly surprised holders of the older bonds. Their debtor had already promised them “the whole of the national property of Greece”.
Modern successors to the tavern visitors, casting their eyes over plans in Monday’s agreement for a fund to hold and privatise €50bn of “valuable” Greek assets, might be forgiven a disconcerting sense of déjà vu.
The fund would be “one source” of repaying Greece’s new loan from the European Stability Mechanism, according to the statement.
Most of the €50bn would also effectively be assigned to payment of official lending: €25bn to pay back loans to recapitalise Greek banks and €12.5bn for paying down existing debt.
That last amount might include the bonds issued last year, which mature in 2017 and 2019, but Greece would not begin paying the restructured bonds’ principal until 2023.
The €50bn privatisations could be a fantasy figure anyway. The IMF’s last published debt sustainability analysis for Greece assumed only €500m of sales were possible a year.
Tony Barber
Whenever a European summit erupts in angry disputes and concludes with questionable compromises, as did last weekend’s talks in Brussels over the Greek crisis, it is invariably English-language observers who put events in the most pessimistic light.
The privatisations are also scheduled “over the life of the new loan”, a potentially indefinite period if the debt’s maturity, like the existing official loans from the eurozone to Greece, is eventually reprofiled.
Nevertheless, this also underlines how official lenders are in control versus the private bondholders.
Greece did not honour its 1832 loan very long. It defaulted in 1843, even after official lenders had installed one of their own as its king, and it only settled in 1864.
The pre-independence creditors waited longer still, however, until 1879, for their default to be cured. Their successors will want to avoid a similar fate.
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