The Benefits of Delaying the Second Greek Bailout Package

As I write, the EU are debating whether they should delay their decision on the second Greek bailout. One issue is that should they delay, then the EUR 14.4B redemption due on March 20 2012 will have to be paid in full rather than be subject to the haircut associated with the Bond Swap. Does this matter?

No. Buying time by delaying the bailout package can have a number of advantages over and above the value of ensuring that the post-election Greek government sticks to their promises…

First, the ECB has been a thorn in the rose garden during the debt swap negotiations. Estimates place the ECB’s holding of the March 20 bond at EUR 8B and they have been insisting on full payment, therefore favouring the ECB over private investors. This would have had legal consequences in the event the government tried to force participation in the swap. Making the payment on March 20 overcomes this problem.

Second, the actual amount of the payment that goes to private investors is quite small. Of the EUR 14.4B to be paid, EUR 8B goes to the ECB (a govt-to-govt transfer) and another EUR 5B goes to the banking sector, most notably the Greek banks. These institutions were intending to receive recapitalisation support directly from the EU anyway so this is just another way of obtaining that support. This leaves only EUR 1.4B that has to be paid to the ‘demon’ private holders such as Greek citizens, pension funds, private individuals and hedge funds.

Third, the March 20 2012, you may recall, was nominated as part of the first bailout package and, indeed, there is still money to be dispersed from that allocation to be used for just this purpose. Paying this would be an act of good faith, generating much needed trust in the EU’s handling of the debt crisis. Keeping promises matters to the markets…

All in all, there is not much of a price to pay for delaying the second bailout package.