Greek Deal Reached, Deeper Problems Ahead

Econintersect:  Eurozone finance ministers have reached agreement on approval of a bail-out plan for Greece.  Key to reaching the final agreement was pushing haircuts on Greek bondholders even deeper than had been previously worked out.  This €130 billion bailout will be the second for Greece, following €110 billion that came in May 2010.  It is clear from a “strictly confidential” report obtained by Peter Spiegel of the Financial Times that the Eurozone finance ministers expect that a third bailout will be necessary down the road, even in the “most optimistic scenario.”

From a CNN report on the strictly confidential documents revealed by Spiegel:

A “tailored downside scenario” in the report suggests Greek debt could fall far more slowly than hoped, to only 160 per cent of economic output by 2020 — well below the target of 120 per cent set by the International Monetary Fund. Under such a scenario, Greece would need about €245bn in bail-out aid, far more than the €170bn under the “baseline” projections eurozone ministers were using in all-night negotiations in Brussels on Monday.

Further estimates reported in the CNN article include €20 billion less than previously expected in proceeds from privatization of Greece’s assets, recapitalization needs of Greek banks have increased by €20 billion and the expectation that Greece will be locked out of bond markets for many years.

The baseline scenario assumes that Greek GDP will not be negative in 2013 and will grow by 2.3% in 2014.

According to Reuters a new haircut of 53.5% in principal will be forced on the private holders of Greek bonds (“voluntarily” so that CDS – credit default swaps – obligations will not be triggered).  Combined with reduced interest coupons and extended maturity for the new roll-over bonds that will replace the old debt, the net present value of the haircut was previously about 70% for a principal reduction of 50%.  Presumably the new larger principal cut has increased the net present value reduction in the new “deal.”  According to Reuters the debt swap will be financed in part by “sweeteners.”  Sounds something like the “spoonful of honey” with bitter medicine deal.

GEI News will report further details later today when they become available.

Sources:

• Eurozone strikes deal on second Greek bailout package (FirstPost.World from Reuters, 21 February 2012)

• 2nd Greek bailout awaits rubber stamp (Chris Gore, IBTimesFX, 20 February 2012)

• Greek debt nightmare laid bare (Peter Spiegel, CNN, from FT.com, 21 February 2012)