In an earlier post (Dec 13, 2011) I argued that Greece was in no position to bargain with the banks voluntarily forgiving them debt. If they did, the banks would likely walk away. Well, the Greek Government is trying to bargain and guess what? The banks are walking away…
What’s going on? First, there is a confusion between debt reduction and debt restructuring. Greece is trying to do both at the same time which makes it difficult for their creditors, and the broader market, to judge the extent of the Net Present Value decline in obligations. Second, the Greek’s cannot make a decision. It appears that the EU, the ECB, the IMF etc etc need to be consulted at every turn. This is very frustrating for their creditors since they really dont know who, if anyone, has the power to agree to a deal. Moreover, the IMF and Germany have every incentive to screw the private sector by simply saying ‘no’ whenever Greece comes with a deal for their assent.
On the first point, I would separate out and deal with the debt reduction question first. A 50% haircut across the board would simply cut the face value of debt in half. Easy and no argument about coupon, discount rate or anything. Debt restructuring could then be left to the Greek Treasury to manage the maturity structure toward something they find acceptable.
On the second point, Greece needs to take control and make a decision. The last two years have all been marked by delay and indecision, and the situation has just gotten worse. Time in the Finance world moves very quickly – the Greeks need to get ahead of the clock!