Private holders of Greek debt might need to accept losses of up to 60 percent on their investments if Greece’s debt mountain is to be made more sustainable in the long term, a downbeat analysis by the EU and IMF showed on Friday.
Eurozone finance ministers threw Greece a lifeline on Friday by agreeing to approve an 8 billion euro (US$11 billion) loan tranche that Athens needs next month to pay its bills.
However, the European Commission, European Central Bank (ECB) and the IMF — the so-called troika — issued a gloomy report on Greece’s ability to pay its debts.
Among three scenarios it examined, the only one that would reduce Greece’s debt pile to 110 percent of GDP — a level still regarded as high — was one in which private bond holders agreed to a 60 percent haircut.
“To reduce debt below 110 percent of GDP by 2020 would require a face value reduction of at least 60 percent and/or more concessional official sector financing terms,” the debt sustainability report, obtained by Reuters, showed.
A footnote explained that the ECB disagreed with including the scenarios in the report, concerned that private sector lenders would refuse to agree to such a steep writedown voluntarily, effectively leading to a fullscale Greek default.
The report also said Greece’s debt pile could peak at 186 percent of GDP, from around 160 percent currently.
The eurozone finance ministers said the 8 billion euro tranche, the sixth installment of 110 billion euros of EU/IMF loans agreed last year, would be paid in the first half of next month, pending the IMF’s sign-off. That should allow Greece to avoid defaulting on its debt this year.
Meeting ahead of a summit of EU leaders today, finance ministers also indicated that deep divisions between France and Germany over how best to scale up the eurozone’s bailout facility to give it more firepower might have been overcome.
France believes the most efficient leverage method would be to turn the European Financial Stability Facility (EFSF) into a bank, allowing it to access ECB liquidity. Germany and others opposed this, and France’s finance minister said he was not going to be unnecessarily confrontational over the issue.
“We will not make it a point for definitive confrontation,” he told reporters as he left the meeting late on Friday. “What matters is what will work. And what will work is something that is dissuasive and an effective firewall.”
Austria’s finance minister, Maria Fekter, who arrived at the meeting saying there were seven options on the table for leveraging the EFSF, left the meeting saying there were now two, indicating that some progress had been made.
If France does ultimately drop its insistence on the EFSF being turned into a bank, then the most likely method for scaling up the EFSF is expected to be some form of insurance program aimed at restoring confidence in eurozone debt.
A group of 10 major financial companies, including banks, insurers and global bond fund giant PIMCO, wrote to EFSF chief Klaus Regling on Friday saying partial insurance of sovereign bonds could be a viable means to secure private funding for eurozone states “if implemented in size.”
“The ability of the EFSF to potentially write significant amounts of such ‘insurance’ without any further increase to the existing commitments should be an important element in any comprehensive plan by the European government to address the crisis,” the letter said.
By guaranteeing only a portion, perhaps one-third or one-fifth, of each debt issue, the available EFSF funds could stretch three to five times further, increasing it to around 1 trillion euros.
However, analysts are concerned that such a plan could create a two-tier bond market, with bonds that have guarantees trading at a premium to the secondary market — an outcome that could exacerbate market turmoil. Some analysts believe choosing such an option would be the worst outcome of the summit.
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