Extending Greek Maturities Is a 'Sticking Plaster': Analysts
Staff Writer, CNBC.com
Soft restructuring is only a temporary measure, and a German-led plan to convince private investors to voluntarily extend maturities on Greek debt will not prevent a default, analysts told CNBC.com.
German banks are the largest private holders of Greek government debt, with $22.7 billion, with French banks holding close to $15 billion, according to data from the Bank for International Settlements released on Monday.
The figures serve as a reminder of the continued risk to European financials of the ongoing debt crisis in Greece and underline the scale of the challenge facing policymakers as they look to convince the private sector to participate in voluntary debt restructuring along the lines of the Vienna Initiative.
In January 2009, European, international and private financiers came to an arrangement to remain invested in Central and Eastern European bank assets, preventing a mass exodus of capital from the region. Some European policymakers hope that the exercise can be repeated for Greece, keeping the private sector involved in lending to the country.
French banks also lent almost $40 billion to individuals and companies in Greece, the BIS data showed.
German and French banks also hold $7.8 billion and $8.2 billion of Portuguese debt, respectively.
In a June 3 research note, Deutsche Bank said that it believed some form of voluntary rollover exercise would be a condition of a second bailout package. On Sunday, the Welt am Sonntag newspaper reported that the German government was planning to ask private creditors to swap their existing debt instruments for those with longer maturities.
For some analysts, including Jonathan Loynes, chief European economist at Capital Economics, this is far from an easy prospect.
"I'm dubious, I have to say, because I think this is a rather different situation," Loynes told CNBC.com. "The key (in Vienna) is that there was a relatively small number of banks who had invested in Eastern European economies and it was in their own collective and individual interests to maintain that support. "
"I think trying to persuade an awful lot of bond investors at an awful lot of different institutions to somehow keep buying Greek debt is I think rather different from what we saw with the Vienna agreement. I think they don't behave in that sort of way," he said.
"The question then arises, what sort of incentives do you have to give these people?" Loynes added. "There's talk of some sort of collateral or preferred creditor status, but it seems to me that you've got a lot of work to do to persuade people to invest in Greek debt at an interest rate that is acceptable and viable for Greece when they are currently demanding, depending on the maturity, 15 or 20 percent interest rates to hold Greek debt."
Nikan Firoozye, head of European rates strategy at Nomura, concurs. "I think it's just a face - saving measure. I think they're going to claim victory if 50 percent of all of it gets rolled, and that it will be mostly the Greek banks that get coerced… In the end it's not going to be huge cost savings for Europe, but it will be a reasonable enough political win," he told CNBC.com.
The moral hazard in allowing Greece to default is a repeated theme amongst political analysts and economists. As Firoozye said, "we don't want to reward Greece just yet."
"The spin doctors will work on this and it will look like there is a lot of private sector participation and we are not putting more German taxpayers' money at risk, but in reality the big thing is just coming up in 2013."
Default Risk Receding - For Now
The threat of imminent hard restructuring seems to have receded, analysts have told CNBC.com. Interpretations for the delay range from a desire to get Spain and Portugal in order first, so as to prevent contagion once Greece "inevitably" defaults – as one analyst said – to a simple lack of consensus amongst policymakers.
There is also a divergence of opinion over whether this could ultimately lead to a greater concentration of risk in public institutions down the road.
"I think that is the conventional market wisdom. I don't believe that it's the view of the European Commission, the ECB or the IMF," Eurasia Group CEO Ian Bremmer told CNBC.com.
"I think that they would argue that there's real importance in improving revenue performance through the privatisation process, through this army of technical assistants to help them through tax administration in Greece, and that they really think that this could have a meaningful impact over time on debt and GDP," Bremmer said.
"There are concerns about the Greeks' capacity to deliver, but there's a real view on the part of big international institutions that you're not just kicking the can down the road, you're actually giving them space to improve in a meaningful way."
Despite a short-term rally at the bottom end of the Greek debt market on the prospect of a second bailout, markets do believe that hard restructuring, even if it is in the longer term, is inevitable, Loynes said, echoing other analysts.
"I think even if you manage to sort out some sort of soft restructuring, perhaps based on some collective agreement among bond investors that they will roll over the debt or buy new bonds, I think there will be a recognition that a bit like the bailouts it will just be a temporary solution to Greece's problems," Loynes said.
"It is not getting to grips with the fundamental issue that it just can't grow strongly enough to prompt any meaningful or sustainable improvement in its public finances, because it has a major lack of competitiveness… and it's undertaking the austerity measures that were forced upon it in the first place."
Loynes is critical of the way that governments and institutions have handled the debt crisis.
"I think this is just very indicative of the way that the policy response to the crisis has been gradually put together throughout, that it has all been done in a rather ad hoc manner, with constant resistance from the ECB, growing constraints from taxpayers on what governments are able to do. We spend a few months putting together a temporary sticking plaster that relieves the tension for a short while, but a few months down the line we're into the next stage of the crisis and the whole process starts again," he said.
Loynes' prediction is more forthright, but no less downbeat than other analysts.
"Our guess is that Greece gets some sort of bailout, maybe there's some moderate restructuring attached to that, but that further down the line you need some sort of more significant form of debt restructuring, but even that doesn't tackle Greece's fundamental economic problems and lack of competitiveness so that slowly but surely we're edging towards the position where Greece and probably one or more other economies eventually decides to leave the single currency," he said.
"A year ago we all thought bailouts were illegal and impossible… The end of a logical sequence is for some of these economies to leave."