Today’s news that the Greek debt reduction has attracted the support of 85.8% of the bondholders is what passes as a success these days in Euroland. The Greek state can now use the collective action clause to make all bonds held under Greek law convert to the new terms. The Greek government claims it will hit the IMF/EU targets for debt reduction through debt restructuring. Bondholders are being made to pay some of the bill of Greek excess spending in recent years.
Each bondholder will receive 15% of their money back in a cash equivalent, and 31.5% of the face value of their bonds in the form of a new 30 year Greek bond paying just 2% at the outset, rising to 4.3% over its lifetime if all goes well. The stated reduction in bondholder wealth is therefore 53.5%. However, the new bonds are unlikely to be worth their par value. Early indications are that Greek debt will continue to change hands on very high yields, meaning if a bondholder wants to sell their new bonds they will have another large loss. They might lose threequarters of the par value on the new bonds, taking their full loss to around three quarters of the capital value at the issue price of their original bond.
Individual investors of course may have lost a lot less, as they may have bought in at much lower prices, and will have received some income. The government is also offering sweeteners in the form of the promise of extra payments if the Greek economy grows well in the years ahead. These probably have little value today, though we all hope for the sake of Greece they do in due course become more valuable.
Whilst many are treating this outcome with relief, it is scarcely good news. An advanced country and a member of the Eurozone has failed to repay its debts. Markets still do not trust fully the new debt instruments the Greek state is issuing. The Greek economy, deep in recession, has just lost more potential spending power from private sector holders of these bonds. This follows hard on the heels of the extraordinary decision to cut the minimum wage by 22%, the minimum wage for young people by 32%, and some of the pensions in payment by 12%.
Greece is an extreme example of how a western economy locked into a single currency has to slash living standards to try to live within its means. After years of building up debt, the country faces the reality that no-one wants to lend to it on anything like normal terms. Inside the Euro all the adjustment has to take place by some combination of smarter working, job losses, wage cuts, and in extreme cases failing to repay debts. The Greek decision to make bondholders take very large overall losses is just part of the huge price the better run members of the Euro and many prudent savers in Europe are now paying for Greek membership of the currency. It would be better if Greece left the Euro as soon as possible, to help them and to help the reputation of Euroland.
The Greek debt swap is seen as a success, but it is part of a much larger painful adjustment which is far from over. Portugal should be worrying, as they are still a long way from being able to return to the markets to finance themselves in the normal way.