Saturday, December 1, 2012

Greek debt "transformed into a zero-coupon perpetual bond”

Assuming the Greek bond buyback goes through as expected (see discussion), the bulk of Greek debt will be held in the form of loans by the "official sector": EU/EFSF and IMF. And the maturity of that debt is getting extended dramatically.
Credit Suisse: - Following the buyback, more than 80% of Greece’s debt will be held by the official sector and seems to be in the process of being – for all practical purposes – transformed into a “zero-coupon perpetual bond”. The average maturity on the EU/EFSF loans (which will soon represent 65% of Greek debt) is increased to 30 years, while there is a ten-year grace period. At the same time, the interest rate on the bilateral loans is below 1%, while interest payments on EFSF loans have been deferred by ten years. This is the third time that euro area countries have restructured the maturities and interest rates of their loans to Greece and they seem comfortable to continue doing so.
Rather than writing down Greek debt principal now, Europe is basically kicking the can (far) down the road. For now this should work well for Greece. The official sector debt not only has "indefinite" maturity, but as Credit Suisse points out, it is also extremely cheap. The new Greek all-in interest expense (including government bonds) as percentage of GDP (event after massive GDP declines) is now below that of the Eurozone as a whole and even below that of the US. Furthermore, the interest on bonds held by the EBK (Eurosystem NCBs) is expected to be returned to Greece.

Source: CS

Whatever the debt to GDP ratio is actually achieved by Greece in the next few years will be irrelevant from the government's standpoint. Rolling of debt or debt servicing will simply not be an issue.
CS: - The debt-to-GDP level is indeed very high and we are expecting it to remain high for many years. Naturally, there would be benefits from a much lower debt-to-GDP level, especially from the perspective of market perception. In reality, it is more debatable whether it would make any difference writing off part of the debt for which Greece pays close to no interest and does not have to repay (for the foreseeable future).

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