After more than a year of recurrent crises and two days of intense talks, the gathering of European finance ministers in Brussels broke up last night with little sign of agreement on how, when or even if Greece should receive further assistance from her European partners and the IMF – with a debt restructuring being openly considered for the first time.
Comments by the chairman of the eurozone group of finance ministers and Luxembourgeois representative, Jean-Claude Juncker, that Greece might benefit from what he termed a "soft restructuring" marked the first time such a move has been admitted by the group and put the issue firmly on the agenda: "If Greece makes all these efforts, then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring of Greek debt," he said.
But his French counterpart, Christine Lagarde ruled out any such thing: "A restructuring or a rescheduling, which would constitute a default situation, what we would call a credit event, are off the table for me." More enigmatically, the German finance minister, Wolfgang Schäuble, has talked about "further measures", interpreted as another bailout, a restructuring of debt, or both. Privately, both German and IMF officials have hinted that, like the markets, they are regarding a Greek restructuring of some sort as inevitable.
European officials have been keen to stress that no agreement on the Greek situation was ever scheduled to emerge now, and especially after the arrest of Dominique Strauss-Kahn. Ministers have formally approved the €78bn (£68.15bn) Portuguese bailout by the eurozone and IMF, and the nomination of Mario Draghi as the next head of the European Central Bank. But Greece has been discussed, and divisions are as sharp as ever on what to do about her unsustainable debt mountain – approaching 160 per cent of GDP.
A joint EU/ECB/IMF "troika" mission to Athens has returned with bad news on Greece's willingness or ability to undertake more privatisation or austerity measures. Hence the renewed focus on her debts. The Greek crisis has spawned a thesaurus of euphemisms for default – the failure of a borrower to repay funds due on the terms and at times previously agreed.
"Restructuring" is a common, but also rubbery term for an "orderly" and "negotiated" or "voluntary" re-arrangement of debts, to be contrasted with a sudden and unilateral default.
Under such schemes – common in the private sector – countries negotiate with their major creditors a discount or "haircut" to the value of the debt, the implicit threat being that if bondholders do not agree to accept some losses they may have to accept bigger ones in the case of a default.
In the case of Greece, the major holders of her debts include her private banks, major French, German and Dutch groups, the Royal Bank of Scotland and the European Central Bank. A restructuring would in any case require a bailout of the ECB and a further recapitalisation of the Greek banks. This process is also complicated because of confusion as to whether CDS insurance on Greek debts would pay out if a deal is judged consensual on the part of bondholders.
That, in turn, could destabilise those who had wrongly assumed they had hedged their Greek exposure. It might trigger a "second credit crunch".
Although the term "restructuring" is often used to cover a lengthening of the maturity on debt or a reduction in interest payments, as is the imprecise term "soft", some prefer "reprofiling" for when bondholders are asked to exchange short-term debt for longer-dated bonds with a similar coupon, giving the debtor more time to repay the loan. This is, apparently, what Mr Juncker had in mind.
In any restructuring, the IMF and European partners rank ahead of private sector bondholders – and, given the size of the IMF/EU rescue package – that would imply some very large "haircuts", or some discounts on bond values – 70 per cent or more. Germany's Chancellor Angela Merkel has said that private bondholders must "share the pain" in any restructuring to take place.Reuse content