Delaying\u00a0Greece\u2019s debt restructuring by more than a year reduced banks\u2019 potential losses as firms trimmed their holdings and most of the risk shifted to European taxpayers.<\/p>\n
When Greece was first rescued by the European Union and the\u00a0International Monetary Fund\u00a0in May 2010, lenders in other EU nations held $68 billion of its sovereign debt, according to theBank for International Settlements. If Greece had defaulted, banks would have lost $51 billion at a 25 percent recovery rate.<\/p>\n
Banks\u2019 holdings of\u00a0Greek bonds\u00a0fell by more than half to about $31 billion over the next 15 months, according to BIS, cutting creditors\u2019 losses at last week\u2019s swap by at least 45 percent. Lenders are protected against further losses thanks to sweeteners from the EU to encourage the exchange. Meanwhile, Greece\u2019s debt remains almost unchanged and the risk of future default is now mostly borne by the public. The same playbook is being used with\u00a0Portugal\u00a0and Ireland.<\/p>\n
\u201cThis is a horrible deal for the EU taxpayer,\u201d said Raoul Ruparel, chief economist at Open Europe, a London-based research group. \u201cThe longer we wait for these restructurings, the worse the deal gets for the public. There\u2019s an ongoing risk transfer from the banks to the taxpayers.\u201d<\/p>\n
On the face of it, the swap chopped 137 billion euros ($179 billion) from Greece\u2019s 368 billion-euro debt burden. The actual reduction is less than half of that because the country has to borrow from the EU and the IMF to provide new debt to private creditors and to recapitalize banks and pension funds that can\u2019t handle losses from the swap.<\/p>\n
The new borrowing — in effect, replacing private with public debt — will amount to 78 billion euros, according to the EU, leaving the actual relief from the swap at 59 billion euros. Greece also will need to draw money from a second, 130 billion- euro EU and IMF rescue fund to repay other private debt and finance the government\u2019s budget deficit.<\/p>\n
That will leave Greece\u2019s debt at 161 percent of gross domestic product at the end of the year, 4 percentage points less than the current level, according to a March 11 report by the European Commission. The ratio probably will return to 165 percent in 2013, the commission said.<\/p>\n
When all IMF and EU loans promised to Greece are disbursed, 66 percent to 75 percent of the country\u2019s debt will be held by the public. In 2010, before the first bailout and before theEuropean Central Bank\u00a0started buying its bonds, Greece had about 310 billion euros of debt, all held by the private sector.<\/p>\n
If Greece has to restructure again, or defaults, taxpayers will be on the hook.<\/p>\n
\u201cThe swap doesn\u2019t achieve debt sustainability for Greece,\u201d said Nicola Mai, an economist at JPMorgan Chase & Co. in\u00a0London. \u201cDebt relief going forward will have to come from the public sector.\u201d<\/p>\n
Banks reduced holdings of Greek bonds as they matured. Greece used loans from the IMF and the EU to make those payments. The European Central Bank also has bought about 66 billion euros of Greek sovereign bonds from financial institutions since May 2010, JPMorgan has estimated.<\/p>\n
Commerzbank AG (CBK),\u00a0Germany\u2019s second-largest bank, reduced its holdings of Greek, Irish and Portuguese sovereign bonds by 70 percent to 1.6 billion euros in the past two years, including a 2.3 billion writedown, according to investor presentations by the firm.\u00a0BNP Paribas SA (BNP),\u00a0France\u2019s largest lender, reduced its long-term exposure to the three countries\u2019 debt by 61 percent to 2.6 billion euros in 2011, including a 3.2 billion-euro writedown, according to company statements.<\/p>\n
\u201cRelative to where banks were a year ago, they\u2019re at a much better point,\u201d said Roger Lister, a New York-based analyst who covers European lenders for credit-ratings firm DBRS Inc. \u201cThey may still face future losses, but those will be at a much smaller scale because their exposure is reduced greatly after all the actions by the EU.\u201d<\/p>\n
The EU\u2019s moves have favored banks, especially the weakest lenders that couldn\u2019t bear losses from a Greek default, according to Peter Tchir, founder of New York-based hedge fund TF Market Advisors.<\/p>\n
\u201cEvery policy seems to be designed to help the zombie banks survive,\u201d said Tchir, whose company focuses on European credit markets.<\/p>\n
It\u2019s not only European banks that have been spared greater losses from exposure to Greece. If the country had defaulted in 2010, losses for all bondholders, including insurance companies and asset managers, would have been 232 billion euros, based on a 25 percent recovery. During last week\u2019s swap, they ended up losing 107 billion euros.<\/p>\n
A similar shift of risk to taxpayers is happening with Portugal and Ireland. The ECB has bought 20 billion euros of each nation\u2019s debt, according to Open\u00a0Europe\u00a0estimates, while the EU and the IMF provided 78 billion euros and 85 billion euros, respectively, in new loans to replace private financing for the two countries.<\/p>\n
In Ireland, most of the public money has been used to pay the debt of failed Irish banks. The ECB and the Irish central bank have taken over financing of the lenders, providing about 140 billion euros of funding and transferring risk to taxpayers.<\/p>\n
Since the November 2010 bailout of Ireland, European lenders have reduced their exposure to that country\u2019s banking system by more than half to 61 billion euros. While current and past Irish governments have tried to stop paying banks\u2019 debts with public funds, the EU has rejected the requests.<\/p>\n
Ireland has been in talks with the EU, IMF and the ECB to extend payments on 30 billion euros of debt linked to the bailout of Anglo Irish Bank Corp. The notes, a form of IOU that must be repaid over more than a decade, are used as collateral for funding from the country\u2019s central bank. The ECB is seeking stronger collateral, Finance Minister\u00a0Michael Noonan\u00a0said today. The changes that the ECB is \u201crequesting will have to align with our interests,\u201d he said.<\/p>\n
Portugal\u2019s borrowing costs rose this month on concern the country might follow Greece into a debt restructuring. Portugal may get a second bailout package from the EU and the IMF this year, according to JPMorgan\u2019s Mai. Unlike Greece, a second rescue won\u2019t include a debt swap, he said.<\/p>\n
\u201cAs long as they continue to push for reforms, there won\u2019t be a political motivation to get the private sector involved and take losses on Ireland or Portugal,\u201d Mai said.<\/p>\n
Even if the political will materializes for a restructuring that involves private bondholders, it might be too late. Most of Portugal\u2019s debt has shifted to the public, said Open Europe\u2019s Ruparel.<\/p>\n
\u201cThey\u2019d like us to believe Greece was a special case and won\u2019t be repeated in other cases,\u201d Ruparel said. \u201cGreece is the worst case, but not a special case.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"
Delaying\u00a0Greece\u2019s debt restructuring by more than a year reduced banks\u2019 potential losses as firms trimmed […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-218","post","type-post","status-publish","format-standard","hentry","category-news"],"yoast_head":"\n