Bond Buyback May Succeed, but Greek Crisis Far From Resolved
- COMMENTARY
By COSTAS PARIS
- Bloomberg News
- Greek Finance Minister Yannis Stournaras in Athens on Nov. 28.
The much-trumpeted bond buyback that is supposed to cut Greece’s debt by €25 billion and convince the International Monetary Fund to approve a loan payment that the country desperately needs to stay above water may be successful and bring calm to the markets for the next couple of months.
But the collateral damage is high and the fundamental Greek problem is far from being resolved.
Once again the cost associated with cutting the mammoth debt fell on the private sector.
Greek banks, which invested en masse in the country’s sovereign bonds during the boom years, saw the value of those bonds cut by more than half in a March swap which all but made them bankrupt.
Now, they are being strong-armed again to participate with what’s left of those bonds in a buyback that will pay about a third of their face value.
Stripped of cash, the banks, which are still waiting to be recapitalized from the March exercise, will have little choice but to come under state control.
But no doubt, when the buyback is completed over the next few days, the country’s sovereign creditors — the euro zone, the IMF and the European Central Bank, which vehemently opposed taking any losses of their own, will again bask in glory for another decisive step to avert a Greek bankruptcy and a possible demise of the common currency.
“Once again, the private sector is called to pay the price for decades of economic mismanagement by successive Greek governments and bailout programs by the creditors which are simply unrealistic,” said a senior Greek banker. “No doubt the crisis will come back with a vengeance and there will be nothing left to milk from us.”
Indeed, while the buyback, a cut in interest rates on Greece’s first bailout program and ECB profits on Greek bonds given back to Athens, will slash the country’s debt by a total of €40 billion and contain the debt-to-GDP ratio to an “acceptable” 120% by 2020, few believe Greece is on a sustainable path.
Privately, the IMF says the Europeans must eventually accept losses on the principal they have lent given to Greece so that the debt ratio comes closer to 100% of GDP if the country is to have a realistic chance of recovery. And, privately, the Greek government is concerned that the consecutive waves of austerity imposed in return for bailout money may finish the economy altogether.
“The market is totally dry, the banks don’t lend, thousands of small and medium businesses have closed down, unemployment is at an all time high and a substantial part of the population can barely afford the basics. We expect hundreds of thousands to make it through the winter wrapped in coats and blankets inside their homes as they can’t afford heating oil. The Greeks are massively depressed and all they hear is that more pain is ahead. Frankly, I don’t know how this can turn around,” said a senior government official.
According to Eurostat, the EU’s statistics agency, some 31% of the population are at or below the poverty line.
The creditors have been proven wrong in almost every economic projection for since the crisis took hold in 2009. Greece produces very little, can’t devalue its currency to gain competitiveness and economic growth was always the result of consumer spending.
Still, the country’s bailout programs have cutbacks as their only ingredient.
Greek voters have been threatened repeatedly that they either take the medicine to stay in the euro zone or leave and face a catastrophe. In the next elections, with the Greeks feeling they have nothing else to lose, that threat may not work and a Greek failure will shake the euro to its core. THE WALL STREET JOURNAL
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