Everything you wanted to know about the Greek bailout…
0The Eurogroup meeting approved the PSI and the second financing programme for Greece amounting to up to an additional €130bn until 2014. The aim of the programme is to bring Greece’s debt back to a sustainable path – with a debt-to-GDP target of 120.5% in 2020 – increase Greece’s competitiveness and restore market confidence.
Debt sustainability
Based on the IMF debt sustainability analysis, the worsening economic conditions in Greece, as well as the higher needs for the banks’ recapitalisation (€50bn instead of €40bn), the IMF deemed the original target of 120% debt-to-GDP in 2020 out of reach.
Instead, Greece’s debt was projected to reach 129% of GDP and therefore further measures were decided. It is worth noting that the IMF states in its analysis, “The debt trajectory is extremely sensitive to programme delays, suggesting that the programme could be accident prone, and calling into question sustainability”.
The haircut on the private sector holdings of Greek government bonds is increased from 50% to
53.5%. The transaction is expected to include €206bn of the outstanding bonds (excl. T-bills). The Private Sector Involvement (PSI) details are as follows:
• For each privately held Greek government bond 53.5% of the face value will be forgiven, 15% will be exchanged for short-dated EFSF securities and the remaining 31.5% will be exchanged for 20 new Greek government bonds with maturities of 11-30 years, replicating an amortization of 5% per year.
• The bonds will be governed under English law and they will carry an average coupon of 3.65%, progressively increasing: 2% for 2012-2015, 3% for 2015-2020 and 4.3% for 2020-2042.
• Separate securities related to future GDP growth will be offered, that will pay up to 1% if growth exceeds currently anticipated levels.
In its debt sustainability analysis the IMF envisages a participation rate of 95% to get to the desired debt level. Given the worsening terms of the PSI offer and the high participation rate needed, it seems unlikely that this will happen in a voluntary way. For that reason, today the Greek government has decided to submit to parliament a draft bill introducing Collective Action Clauses (CACs) to the Greek government bonds governed under Greek law. The reported exchange of the ECB holdings under SMP with new ones of identical structure, but protected against such clauses, reinforces the view that CACs are likely to be used, in order to force any hold-outs.
In order to get closer to the desired debt level, the official sector decided to contribute to the debt restructuring:
• Euroland countries may allocate profits from the ECB’s SMP to improve Greece’s debt sustainability.
• The interest rate on the Euroland bilateral loans of the first programme will be retroactively lowered so that the margin amounts to 150bp, with no additional compensation for higher funding costs. This will reduce debt-to-GDP in 2020 by 2.8pp and lower financing needs by around €1.4bn over the programme period.
• Governments whose national central banks hold Greek government bonds in their investment portfolio commit to pass on to Greece an amount equal to any future income accruing from this portfolio until 2020. This would help reducing the debt ratio by 1.8pp by 2020 and lower financing needs by €1.8bn over the programme period.
Official loans
• The disbursements of the funds needed for the PSI (€30bn of ‘sweeteners’, €5.7bn of accrued interest, €23bn for the recapitalisation of the banks) and the final decision on the second loan are subject to a successful PSI operation and confirmation of the legal implementation of the agreed prior actions. The official sector, including the IMF, will decide on the exact amount in early March, once the PSI is concluded.
• The €130bn of the second financing programme will be on top of the c. €35bn remaining from the first financing programme.
• In the statement, the Eurogroup said, “We reiterate our commitment to provide adequate support to
Greece during the life of the programme and beyond until it has regained market access”.
Escrow account – Enhanced monitoring
• The Eurogroup agreed for the Commission to strengthen its Task Force in Greece and to include a permanent monitoring team.
• An escrow account will be set up, under the monitoring of the troika, in which Greece will ensure it always holds a quarter’s debt service.
• Greece will introduce over the next two months in its legal framework a provision prioritising debt servicing. The provision will be also introduced in the constitution.
Timeline of upcoming events in Greece
Following the Eurogroup approval of the second financing programme for Greece, here is an indicative timeline of upcoming events.
• Tue, 21 Feb: Greek parliament votes on the introduction of CACs to the outstanding Greek government bonds governed under Greek law.
• Wed, 22 Feb: Greece makes formal public offer for the PSI. Bondholders have around two weeks to communicate whether they will participate or not.
• Thu-Fri, 1-2 Mar: EU Heads of State meeting.
• By the beginning of March: Euroland countries should approve the second financing programme for Greece at the national level. From our understanding, five countries have to vote in parliament, namely Germany, the Netherlands, Finland, Slovakia and Estonia. The German parliament is expected to vote on February 27, while the Estonian parliament was set for February 23. The Finnish parliament said it would give final approval in the week beginning March 12. The Greek parliament also has to legislate on the measures that are considered “prior actions”.
• Thu-Sun, 8-11 Mar: The debt swap takes place.
• Tue, 20 Mar: Bonds worth EUR 14.4bn are maturing. Greece should have completed the PSI before then to avoid payment of the full amount (or default).
• April: An early election is expected to take place.
James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla
