It’s a fallacy that private creditors to Greece – taking a massive “haircut” on their investment as part of a debt-restructuring deal – are losing out while the official sector’s holdings are protected, Nouriel Roubini, chairman of Roubini Global Economics, wrote in the Financial Times.
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Nouriel Roubini
The world-renowned economist argued Thursday that the Private Sector Involvement (PSI) deal – agreed to as part of Greece’s 130 billion euro ($172 billion) bailout – which sees private bond holders take losses of 53.3 percent, is actually a very good deal.
“The reality is that private creditors got a very sweet deal, while most actual and future losses have been transferred to the official creditors,” Roubini wrote.
Roubini argued that the official sector had begun its own form of debt restructuring some time ago.
“The official sector began restructuring its claims well before the private sector creditors. Maturities were lengthened and the interest rate on those loans reduced, repeatedly,” he wrote.
He said that this should not have been the case because “all official loans should have been treated as senior to private ones as they were all extended after the crisis struck.”
He said that by 2014, two-thirds of Greece’s debts will be in the hands of official creditors, which will end up taking the brunt of losses. Private creditors, he said, shouldn’t complain.
“They should stop complaining. They will take some losses but those losses are limited. Indeed, the fact that the new bonds are expected to be worth more than the old bonds suggests that this PSI exercise has further transferred losses to official creditors,” he wrote.
Charles Dallara, managing director of the Institute of International Finance, told CNBC in an interview that real losses for private sector bond holders would be “north of 70 percent.”
Roubini further argued that the deal, which is expected to reduce 100 billion euros from the country’s debt, will not help with the bigger problem of reducing the country’s debt-to-GDP ratio.
“Even after private sector involvement, Greece’s public debt will be unsustainable at close to 140 percent of GDP: at best; it will fall to 120 percent by 2020 and could rise as high as 160 percent of GDP,” he wrote.