After months of conflict, Greece and its many creditors appear to have found agreeement on one point: the need to restructure the country’s €320bn debt pile.
This week the International Monetary Fund published its advice which called for relief “on a scale ... well beyond what has been under consideration to date”.
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Mario Draghi, president of the European Central Bank, said the principle was “uncontroversial”. Even Wolfgang Schäuble, Germany’s hardline finance minister, acknowledged on Thursday that Greece needed debt relief.
But that is where the consensus ends.
Mr Schäuble said a “debt haircut is incompatible with membership of the currency union”, and suggested that Greece would be better off leaving the euro, at least temporarily.
If Greece’s creditors concur that its debt mountain must be reduced, they have not yet figured out how to do it.
In the history of restructuring unsustainable sovereign debt — even debt that is owed to other governments — there has always been more than one way to skin a creditor.
How many ways are possible for Greece?
Mr Schäuble is worried about a “haircut” – a reference to a simple reduction in a debt’s face value, such as taking a loan priced at 100, and making it 50.
A haircut would have the virtue of cutting Greece’s stock of debt upfront and immediately. For Mr Schäuble however, it might also be illegal under EU Treaty law, which may treat haircuts as equivalent to direct fiscal transfers to Greece, something that is prohibited to all member states.
Even if he is wrong, another way may work better for Greece. This is “net present value” relief — or cutting the future burden of payments on its debts.
The IMF thinks that the costs of servicing Greece’s debt present more of an economic burden than the absolute amount itself, especially given that most of the latter is owed to official creditors and will not be transferred to private markets any time soon.
The official creditors also have it in their power to reduce present value by extending the future date at which Greece pays them back, or by deferring when it has to start paying interest.
Look no further than the writedowns which private bondholders already weathered in Greece just over three years ago.
In March 2012 nearly all Greece’s remaining bondholders exchanged their securities for bonds of diminished value after months of negotiations. The old bonds received haircuts of up to 65 per cent, knocking €107bn off their face value.
In present value terms however, relief was more like €100bn, or a 55 per cent haircut, because of official financing for some parts of the restructuring.
Later that year, the eurozone lenders also agreed to extend their own timeline for repayment by 15 years and defer interest for a decade.
Start with the present value tools such as extending maturities.
The IMF’s own core proposal — moving repayment on the eurozone loans out by three decades — “may be enough for investors to reassess sustainability and open the door for Greece to finance itself in the market”, according to Alberto Gallo, an analyst at Royal Bank of Scotland.
Larger maturity extensions — such as 40 or 50 years — mean that the economic relief is equivalent to nearly 40 per cent of gross domestic product.
For relief beyond this level, Greece would begin to require actual nominal haircuts — RBS pencils in 40 per cent — on eurozone loans.
A 40 per cent nominal haircut on its own would only produce relief equivalent to 20 per cent of GDP, suggesting maturity extensions — perhaps even longer than half a century — will play a part in a deal.
Are there any other ideas?
One curveball, suggested by Mitu Gulati, a professor at Duke law school, and Lee Buchheit, a lawyer at Cleary Gottlieb.
In a paper published this week, they propose that official creditors should offer to be paid back behind a select group of future private bondholders as a way of encouraging market investors to lend to Greece again.
If Greece is ever to leave its status as a ward of official creditors and return to markets, it is an idea worth considering.
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