Greek public debt could be more than 80 billion euros lower and therefore viable since 2012, in case that bonds buyback in December 2012 would proceed under pre-agreed prices after negotiation, according to two economic and legal studies, as revealed by the journal "Epikaira".
An analysis by Panos Panagiotou*
These studies are: "The Greek Debt Restructuring: An Autopsy", by Jeromin Zettelmeyer, Christoph Trebesch, and Mitu Gulati under the Peterson Institute for International Economics, and "The Gathering Storm: Contingent Liabilities in a Sovereign Debt Restructuring", by Lee C. Buchheit and G. Mitu Gulati.
These studies conclude that there were unjustifiable mistakes which cost Greece more than 80 billion euros in uncut and un-buyback debt, without losses from payments on interests, recession and unstructured bonds under the state guarantee to be considered.
According to the facts of these studies, Greek public debt could be close to or below 120% of GDP in 2014, and therefore considered viable since 2012, ending officially the Greek crisis.
More specifically, the debt could be lower in case that the Greek bond buyback price would be different from the then market prices which were over doubled relative to those of the preceded PSI program. In case that the PSI program would be designed differently and applied earlier, when it was initially decided, in June 2011, instead of a few months later, in March/April 2012, the Greek debt would be significantly lower, according to the article of "Epikaira". Additionaly, the loans of PSI could be smaller.
Additionally, the Greek state lost the opportunity to restructure hundreds of bonds under the Greek state guarantee, by choosing to put in the PSI only 36 series of bonds under the state guarantee - those, which under the rules of Eurostat should be considered part of the public debt.
The most important mistakes
According to the study of Peterson Institute for International Economics on PSI program and buyback bonds in December 2012, authorities went out of targets by:
- Offering exceptionally high cash “sweeteners” (15% of the value of old debt, the largest such sweetener ever recorded);
- Offering an upgrade of governing law for most creditors (from old Greek law bonds to new English law bonds), as well as the “co-financing agreement” with the EFSF which tried to align the priority of bondholders with that of some official loans;
- Leaving sovereign guaranteed bonds untouched and outside the reach of the 23 February bondholder law.
- Using domestic law merely to introduce a collective action provision rather than to change payment terms;
- Eschewing legal techniques such as exit consents to discourage potential holdouts among the holders of English law bonds;
- Offering unsuccessful holdouts exactly the same bundle as participating creditors (as opposed to keeping their old bonds with modified payment terms, for example, which would have put them at a disadvantage);
- Avoiding default threats directed at potential holdouts (with few last-minute exceptions, see section 3), hence giving the impression that except for the use of collective action provisions, the exchange was indeed voluntary – and indeed confirming that impression ex post by repaying holdouts in full and on time;
- Carrying out the December buyback at market prices, rather than using a fixed negotiated buyback price.
Also, according to the calculations in the specific study, Greece could achieve a direct nominal decrease of debt up to 64.9 billion euros in case that costly PSI mistakes would be avoided:
"To summarise, the debt restructuring could have been handled better, even without involving the ECB or bailing in bank bondholders. In particular, it should have been conducted earlier and used a different design, involving modestly higher average present haircuts applied consistently to all bondholders. The combination of earlier timing (for example, conducting an exchange in June of 2011 rather than March/April of 2012) and different design would have achieved additional debt relief of perhaps €60 billion in face value terms and €45 billion in present value terms – almost 25 per cent of GDP. This would almost surely have been sufficient to make the remaining Greek debt sustainable."
Concerning the bond buyback at market prices rather than using a fixed negotiated buyback price, it was something that cost to Greece 7 to 17.4 billion euros, according to the study.
A direct cost of 82.3 billion euros
According to the researchers of the Peterson Institute for International Economics study, the cost for Greece as direct nominal debt decrease is up to 82.3 billion euros (up to 64.9 billion euros from PSI and up to 17.4 billion euros from bond buyback).
The cost of these mistakes prevented Greek debt to become viable, already from 2012, and extended the crisis for at least two years. This has resulted in further cost by shrinking GDP, as well as paying interests for the debt, among other things, while led to new loans for the completion of PSI and probably new loans for the 2014-2015 period.
*Panos Panagiotou is a stock market technical analyst
It would be worth to focus on the conclusion that
"The combination of earlier timing (for example, conducting an exchange in June of 2011 rather than March/April of 2012) and different design would have achieved additional debt relief of perhaps €60 billion in face value terms and €45 billion in present value terms – almost 25 per cent of GDP. This would almost surely have been sufficient to make the remaining Greek debt sustainable."
because during the crisis, the Greek GDP shrank by 25%.