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Paris Club could help provide Greece with long-term solution to debt problem
Informal group of sovereign creditors may proceed with restructuring along the lines of Iceland
By Dimitris Kontogiannis
Eurozone governments may disagree but most pundits think Greece’s public debt is unsustainable and will have to be restructured at some point. If the pundits are right, the country will most likely be called upon to do so after mid-2013, when the proposed European Stability Mechanism (ESM) succeeds the current European Financial Stability Fund (EFSF).
This may suit everybody, especially the other eurozone countries and their banks, since the so-called contagion effect is likely to be smaller by then. Although this is desirable, it may not be feasible if Greece is unable to implement the economic program. Therefore, another solution, perhaps a Paris Club one, may be more suitable and better for Greece and everybody else and should be implemented earlier.
There is no doubt that the reduction of the interest charged on the official loan to Greece from eurozone countries may help alleviate somewhat the country’s debt sustainability program but it certainly does not resolve it.
Although lowering the interest burden of servicing the debt is important, it is likely to be offset, at least partially, by a more sluggish economy facing a huge debt-to-GDP ratio close to 160 percent in the next few years.
The Hellenic Statistical Authority confirmed that real gross domestic product fell 4.5 percent last year compared to earlier expectations of 4.0 percent, contributing to an even bigger budget deficit, likely in the order of 9.6-9.8 percent of GDP. Moreover, it looks likely that the economy may drop by more than the estimated 3.0 percent this year.
It is reminded that nominal GDP growth, the average cost of debt and the primary budget surplus are the three key parameters in any debt sustainability exercise. For Greece, which starts from a high debt-to-GDP ratio, a large primary budget surplus along with economic growth exceeding the average cost of debt is the preferred combination to put the debt-to-GDP ratio on a downward path fast.
However, more and more analysts believe this can be achieved without some kind of debt relief.
Although many in Greece did not pay much attention to it, the recent statement by the European Council (EC) shed some light on this issue post mid-2013.
The EC’s statement denotes that a country deemed to be insolvent on the basis of the debt sustainability analysis conducted by the Commission and the IMF in liaison with the ECB has to negotiate a comprehensive restructuring plan with its private sector creditors to restore debt sustainability.
If the restructuring plan can achieve debt sustainability, the ESM may provide fresh loans, it said.
These loans will enjoy a “preferred creditor status,” junior only to IMF loans, meaning private sector holders of government bonds issued by member states borrowing from the ESM will have their claims subordinated to those of official creditors.
According to credit rating agency Standard & Poor’s, this provision, assuming it is implemented, will give the ESM the right to require a sovereign borrower to restructure its debt with a view to attaining debt sustainability.
In this regard, it will be very difficult for Greece to convince private investors to buy any new bonds it may issue in the next few years and therefore the country will have to depend on EFSF and later ESM loans to keep on going.
This is so even if the country managed to meet the budget deficit goals set in the economic policy program agreed with the EC, the IMF and the ECB.
But Greece is already struggling to meet this year’s fiscal deficit goal set in the eurozone-IMF program, which makes it even more unlikely it will be able to borrow in international markets on its own in the next few years.
However, in mid-2013, when the ESM comes into play, a large portion of the Greek public debt will be in the hands of official creditors and the local banks, pension funds and other individuals. From the point of view of our partners, the impact of restructuring on commercial banks will be small and the contagion effect to other sovereigns will be smaller.
But mid-2013 is still far away and Greece may not be able to implement the EU-IMF economic program. So our partners may have to decide to do something earlier than that, perhaps in late 2011 or preferably in 2012 when a large portion of Greek debt will be in the hands of ECB, eurozone countries, the IMF and Greek entities.
If this is the case, they may decide to come up with a Paris Club solution. The Paris Club is an informal grouping of sovereign creditors where finance ministers and central bankers negotiate what to do when a country’s debt is deemed unsustainable.
In this regard, one may think that they proceed with a restructuring along the lines of Iceland, whose debt was rescheduled for 30 years or more at a low interest rate of around 3.0 percent on average.
Of course, the remaining private sector holders of Greek bonds will also be called to pay a price but this may also be the key to Greece’s return to the markets sooner rather than later and put the EU’s public money to a better use afterward.
ekathimerini.com , Sunday March 20, 2011 (23:12)
***
Un articolo che giunge puntuale rispetto alla discussione partita da Stockexchange ...
Da leggere.
Informal group of sovereign creditors may proceed with restructuring along the lines of Iceland
Eurozone governments may disagree but most pundits think Greece’s public debt is unsustainable and will have to be restructured at some point. If the pundits are right, the country will most likely be called upon to do so after mid-2013, when the proposed European Stability Mechanism (ESM) succeeds the current European Financial Stability Fund (EFSF).
This may suit everybody, especially the other eurozone countries and their banks, since the so-called contagion effect is likely to be smaller by then. Although this is desirable, it may not be feasible if Greece is unable to implement the economic program. Therefore, another solution, perhaps a Paris Club one, may be more suitable and better for Greece and everybody else and should be implemented earlier.
There is no doubt that the reduction of the interest charged on the official loan to Greece from eurozone countries may help alleviate somewhat the country’s debt sustainability program but it certainly does not resolve it.
Although lowering the interest burden of servicing the debt is important, it is likely to be offset, at least partially, by a more sluggish economy facing a huge debt-to-GDP ratio close to 160 percent in the next few years.
The Hellenic Statistical Authority confirmed that real gross domestic product fell 4.5 percent last year compared to earlier expectations of 4.0 percent, contributing to an even bigger budget deficit, likely in the order of 9.6-9.8 percent of GDP. Moreover, it looks likely that the economy may drop by more than the estimated 3.0 percent this year.
It is reminded that nominal GDP growth, the average cost of debt and the primary budget surplus are the three key parameters in any debt sustainability exercise. For Greece, which starts from a high debt-to-GDP ratio, a large primary budget surplus along with economic growth exceeding the average cost of debt is the preferred combination to put the debt-to-GDP ratio on a downward path fast.
However, more and more analysts believe this can be achieved without some kind of debt relief.
Although many in Greece did not pay much attention to it, the recent statement by the European Council (EC) shed some light on this issue post mid-2013.
The EC’s statement denotes that a country deemed to be insolvent on the basis of the debt sustainability analysis conducted by the Commission and the IMF in liaison with the ECB has to negotiate a comprehensive restructuring plan with its private sector creditors to restore debt sustainability.
If the restructuring plan can achieve debt sustainability, the ESM may provide fresh loans, it said.
These loans will enjoy a “preferred creditor status,” junior only to IMF loans, meaning private sector holders of government bonds issued by member states borrowing from the ESM will have their claims subordinated to those of official creditors.
According to credit rating agency Standard & Poor’s, this provision, assuming it is implemented, will give the ESM the right to require a sovereign borrower to restructure its debt with a view to attaining debt sustainability.
In this regard, it will be very difficult for Greece to convince private investors to buy any new bonds it may issue in the next few years and therefore the country will have to depend on EFSF and later ESM loans to keep on going.
This is so even if the country managed to meet the budget deficit goals set in the economic policy program agreed with the EC, the IMF and the ECB.
But Greece is already struggling to meet this year’s fiscal deficit goal set in the eurozone-IMF program, which makes it even more unlikely it will be able to borrow in international markets on its own in the next few years.
However, in mid-2013, when the ESM comes into play, a large portion of the Greek public debt will be in the hands of official creditors and the local banks, pension funds and other individuals. From the point of view of our partners, the impact of restructuring on commercial banks will be small and the contagion effect to other sovereigns will be smaller.
But mid-2013 is still far away and Greece may not be able to implement the EU-IMF economic program. So our partners may have to decide to do something earlier than that, perhaps in late 2011 or preferably in 2012 when a large portion of Greek debt will be in the hands of ECB, eurozone countries, the IMF and Greek entities.
If this is the case, they may decide to come up with a Paris Club solution. The Paris Club is an informal grouping of sovereign creditors where finance ministers and central bankers negotiate what to do when a country’s debt is deemed unsustainable.
In this regard, one may think that they proceed with a restructuring along the lines of Iceland, whose debt was rescheduled for 30 years or more at a low interest rate of around 3.0 percent on average.
Of course, the remaining private sector holders of Greek bonds will also be called to pay a price but this may also be the key to Greece’s return to the markets sooner rather than later and put the EU’s public money to a better use afterward.
ekathimerini.com , Sunday March 20, 2011 (23:12)
***
Un articolo che giunge puntuale rispetto alla discussione partita da Stockexchange ...
Da leggere.
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