17 May 2011

Reprofiling: Greece’s restructuring-lite

At yet another late night Brussels meeting, another first in this ongoing Euro area debt crisis. For the first time, a public suggestion that Finance Ministers will discuss with Greece’s creditors about lengthening out the repayment of the country’s debts. This would change the “structure” of Greece’s national debt, but would fall short of “restructuring”. Euro ministers appear to be settling on the concept du jour: “reprofiling”.

The president of the Eurogroup Finance Ministers Jean-Claude Juncker told reporters that Greece still had to take more measures, more privatisations, to catch up on the backsliding on its bailout programme. “If all these conditions are fulfilled, we can then discuss the question of reprofiling… It’s not reprofiling or nothing. It’s measures, measures, measures, and then maybe reprofiling”.

He sought to draw a distinction with the much-feared, much- anticipated prospect of Greece defaulting on its debts: “I have to repeat that nobody was mentioning a large restructuring,” he said.

So this is quite some development over night here in Brussels. It is the EU ministers and officials beginning to turn the tanker around on their hitherto dogged insistence that all EU sovereign debts will be honoured before 2013. Their wriggle room on this insistence, is that reprofiling might be agreed voluntarily with creditors rather than coercively applied.

If reprofiling sounds like a slightly weaselly made-up word, well that’s about right.

There are formal definitions which revolve around extending out bond maturities by a few years. In this instance it appears that the EU wants to perform minor surgery on Greece’s outstanding debts, but wants to fall short of a “credit event” which enables holders of Credit Default Swaps to cash in their bets, and allows them to say they are keeping to their no default promise made at the Deauville summit. The key features: bank creditors to Greece will have to participate voluntarily, any “haircut” to lenders will have to be small or non-existent.

Uruguay in 2003 is one precedent. It extended the maturity of each of its 18 series of bonds by 5 years, with no haircut, and paid out the same interest (coupon). Uruguayan authorities describe this negotiation as a prisoner’s dilemma, where at each stage the creditors had to be induced to participate. They treated foreign and local creditors equally. All creditors faced the same loss in the net present value of their Uruguayan debt: about 20 per cent. But 98.7 per cent of domestic investors and 89.6 per cent of international investors participated. This is much higher than participated in the 1980s emerging market debt restructuring.

Now, frankly put, Uruguay probably had more goodwill than Greece has to work with, but it is a template. Having said all of that, it is quite clear that this option is firmly now on the table, but only if Greece takes further action, particularly on selling off €50bn of state assets. (And there are some remarkable ideas floating round Brussels, and Euro Finance Ministers to essentially put the entire Greek privatisation plan itself into private hands, over the heads of the Greek government). This move takes things in the direction that has been pointed in Germany. Importantly though, France seems to be saying the opposite, and seems rather hostile to this sort of talk. “restructuring, reprofiling – off the table,” she told reporters last night.

For some economists this is another form of kicking the can down the road and avoiding the inevitable. A certain amount of can-kicking might be helpful however. One bond trader I spoke to said that any formal restructuring would be much more easy to fly if Greece had actually returned to primary surplus. The example of the 1980s Brady bonds, see first paper linked below, shows that a multi-year pause arranged by James Baker enabled banks to build up loss buffers which muted the impact of eventual defaults on financial stability.

So this could mount a major change of direction, with implications for Ireland, Portugal, and Europe’s banks. But it is not yet agreed by the big powers. Perhaps the effect of the leaderless IMF is being felt rather keenly.


HT: the FT’s Alan Beattie, worth a follow on twitter.com/alanbeattie

Excellent paper on Greece’s options: http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=3005&context=faculty_scholarship

Further reading on Uruguay reprofiling:  http://r0.unctad.org/dmfas/docs/steneri.pdf