Greece’s debt deal is just “the end of the first act”, says Aberdeen Asset Management’s Michael Turner. The good news is that Athens has avoided a disorderly default now that private creditors holding €206bn of government paper agreed to swap their bonds for new ones at a huge discount to face value. The new bonds also offer lower interest rates and have longer maturities, meaning that holders face overall haircuts of around 70%.
The deal marks the biggest sovereign restructuring in history. The deal has also triggered payouts on credit default swaps – insurance against a Greek default. This will cost the banks who sold the insurance $3.2bn. Greece has now reduced its total debt pile by around €100bn, or a third of the total. The deal is designed to unlock €130bn of aid from the European Union and the International Monetary Fund. It will be Greece’s second bail-out, following the €110bn rescue package in 2010.
Unfortunately, it won’t be enough to get Greece out of its hole. As Neil Unmack notes on Breakingviews, if all goes according to plan, Greece’s debt as a proportion of GDP will only fall from today’s 160% of GDP to 120% – still widely deemed an unsustainable level – in 2020. But Greece’s adherence to the debt-reduction plan is “a heroic assumption”, says Liam Halligan in The Sunday Telegraph. The economy has shrunk by 15% since 2008 and is set to contract by 7% this year.
The EU hopes that Greece is almost out of recession, but austerity has undermined growth, worsening the scale of the debt as a share of national income, and there is more austerity to come. This downward spiral suggests another rescue package is inevitable, while the “political backdrop… is also likely to deteriorate”.
Indeed, the likely stalemate in national elections due in April or May will do nothing to “convince Greece’s lenders that the political will is present to stick with the programme”, says Ingrid Melander on Reuters.com. Ongoing protests may provide an additional incentive for politicians to abandon the programme. So the threat of a chaotic default and euro exit has not gone away, and it won’t be long before “a huge element of uncertainty” returns to plague the markets, says Berenberg Bank’s Holger Schmieding.
And not just over Greece, said Buttonwood on Economist.com. Sky-high bond yields suggest Portugal, forced into a bail-out a year after Greece’s first, “will again follow the Greeks’ lead”.