Greece’s Investors Reluctant to Take a Bath

ATHENS – Only a day after Greek officials said they were optimistic about reaching an agreement with banks and investors to write down as much as 50 percent of the country’s debt, reports said many are balking at the deal, which could jeopardize a second bailout of some $175 billion the country needs to stave off default. Greece is surviving on a series of $152 billion in rescue loans that haven’t been enough to keep the country from teetering on the edge of bankruptcy and desperately needs another infusion of cash, but banks and other investors now say they don’t want to forgive some $130 billion of what Greece owes. European and Greek negotiators met with representatives from banks and investment funds on Dec. 16 in Paris, after holding talks earlier this week in Athens and were trying to work out the terms under which private creditors are willing to exchange their existing Greek bonds for new ones with a lower face value.
The swap, which was meant to go ahead in early 2012, is supposed to reduce Greece’s debt to 120 percent of Gross Domestic Product (GDP) by 2020. Without a restructuring, Greece’s debt load would reach almost 200 percent of GDP by the end of 2012, a hole from which no country has ever recovered. Some investors had taken out insurance on their Greek bond holdings, and if they voluntarily agree to the swap, they will not receive the insurance payments they would have if Greece had just defaulted. Others, who may have bought the bonds at already depressed prices, may be willing to take a gamble in the negotiations and try for a bigger payout, the Associated Press reported.
“They are not making it easy, to say the least. It will take time,” said one European official. “They are trying to reopen things” that were already considered decided, the official added, without providing details. A second European official confirmed that a final deal on the debt relief was still elusive. Both spoke on condition of anonymity because the talks were going on behind closed doors.
The cautioning words from the two officials came as Greek Finance Minister Venizelos told the Greek Parliament he was confident the debt write-down would go ahead, an optimistic pattern in which he regularly engages, although the results often fail to match the hopes. “I believe we will achieve that because I have positive signs from the consultations and the course of the discussions,” Venizelos insisted despite the worrying reports. “That would offer the Greek people … a return for its sacrifices and a prospect for younger generations.”
The 17 nations in the Eurozone that use the euro and bank representatives reached a deal to reduce Greece’s debts in late October after determining that the struggling country would not be able to repay them in full. Greek banks face the prospect of having much of their holdings wiped out and are pressing the government, fearful they could be nationalized and left with no assets. They have already severely cut back on loans to customers and frantically pursuing credit card arrearages.
The Institute for International Finance (IIF,) which has been leading the negotiations for banks, has insisted that losses for investors have to be kept as low as possible for them to agree to participate voluntarily even while Greek consumers are being chased to pay their debts in full. To keep overall losses under control, private creditors are pushing for higher interest rates from Greece and expensive collateral to secure the new bonds. That, in turn, could eliminate much of the benefits to Greece of a cut in the bonds’ face value. Of the $175 billion in the second bailout, some $39 billion is meant to provide collateral for the bond swap, eliminating much of the benefit of a debt write-down.
The IIF said “the private sector welcomed the willingness of the authorities to work on means to enhance the quality of the exchanged debt” — shorthand for the collateral provisions. It said the talks had made progress “and both sides agreed to continue their effort to find a voluntary solution that would help put Greece on a path of debt sustainability and economic recovery.” The concept behind the debt forgiveness is that getting back half of an investment is better than the much bigger losses bondholders would likely face if Greece defaults.
While the politicians and bankers were debating, Greeks were worrying and a survey showed nearly two-thirds now believe the country will default no matter what happens and that it would take at least five years for the country to recover. The same poll also showed that 55.1% of Greeks say they expect their economic situation to deteriorate in the next 12 months, and 53.8 percent say any economic recovery will take half a decade or more. Some 21 percent of Greeks say the economy will never recover.
Perhaps more telling is a barometer of  how deep the pessimism is even as a temporary coalition government led by former European Central Bank Vice-President Lucas Papademos tries to secure the second bailout. He’s overseeing a shaky Cabinet of holdovers from the former ruling PASOK Socialists, their bitter rival New Democracy conservatives and the far Right-Wing LAOS party.
The poll showed New Democracy, which lied about the country’s economic condition and created the crisis in 2009, leads PASOK, but still has only 20.7 percent support compared to the former rulers, and that 26.6 percent of Greeks are undecided or are so disgusted with both parties who took turns packing the payrolls with political hire for generations that they wouldn’t vote.
(Sources: Kathimerini, AP, Dow Jones)