For over a year now, myself and other Eurozone watchers have argued that the resolution of the Greek sovereign debt crisis must involve a write down of the value of that debt. Well, that appears to be what’s finally occurred. From this AMs NYT:
Greece said Friday that it had clinched a landmark debt restructuring deal with its private sector lenders. The deal clears the way for the release of bailout funds from Europe and the International Monetary Fund that will save the country from imminent default.
The Greek finance ministry said that 85.8 percent of private creditors holding 177 billion euros in Greek bonds participated in the bond swap. After invoking collective action clauses, provisions that will force the holdouts to accept the offer, the participation rate would rise to 95 percent and meet the target set by Europe and the I.M.F. for the release of crucial rescue funds.
Other news sources are reporting that the restructuring will reduce the value of outstanding debt by about half. This is obviously a tough deal for creditors—more of a crew-cut than a haircut—but it’s what has to happen if we ever want to get out of the extend-and-pretend cycle that’s kept this thing dragging on in dribs and drabs. If you’re looking at insolvency, vs. illiquidity, which we are in Greece, then you either rip off the bandaid like this or you just keep bleeding.
An interesting wrinkle here involves the credit default swaps that are supposed to kick in (these are essentially insurance policies held by bond holders that pay off in the event of a default like this). The NYT reports that this restructuring could “result in an estimated 3 billion euros in claims being paid out to investors.”
That’s a lot smaller amount than I would have guessed—there’s something like 200 billion euros held in the bonds eligible for the restructuring. Not sure why but I’m going to look into it.