Next time, Greece may need new tactics

The final private creditor deal announced was supported by 86 per cent of the bondholders.

The Greek government was able to legally strong-arm most of its private bondholders into accepting the debt reduction deal it completed recently. But next time Greece might have much less leverage.

That’s because as a result of last week deal, the bulk of Athens’s 260.2 billion euros ($341 billion) in remaining government debt will now be held by the IMF, the European Central Bank and the individual European nations that have lent Greece money and contributed to the region’s bailout fund.

Politically, Greece would be hard-pressed to force debt losses on such a formidable international group, the way it did with the private banks and hedge funds that have just been forced to accept a 75 per cent loss on their Greek bond holdings. Greece’s main creditors, in effect, are now foreign taxpayers — who are likely to be much less malleable than the private creditors if Greece needs to renegotiate its staggering debt load a year two down the road.

“From now on, whatever happens in Greece, it will be a matter between Greece and the taxpayers of the rest of the euro area,” said Jacob F Kirkegaard, an analyst at the Peterson Institute for International Economics in Washington.

The final private creditor deal announced  was agreed to by nearly 86 per cent of the bondholders; the number was expected to rise to 95 per cent after Athens invoked a so-called collective action clause forcing others to join in. Without such a deal, Greece had strongly implied, it might default altogether, with no one getting paid. The outcome has enabled Greece to reduce its debt load by just over 100 billion euros, or about $132 billion.

Later in the day, the International Swaps and Derivatives Association ruled that the agreement was nonetheless a technical default by Greece — a ruling that will mean payouts on some insurance contracts, known as credit-default swaps, that various investors had taken out on the privately held Greek debt. Around $70 billion in default swaps on that debt are outstanding, although analysts expect the net payout to end up at only $3.2 billion or so.

As recently as 2008, virtually all of Greece’s government, debt was held by private sector bondholders, chiefly banks and investment funds. But as a result of Greece’s escalating debt crisis and intervention by public institutions, private creditors now hold only 27 per cent of Greece’s debt.

Greece, in essence, has become a financial ward of Europe. And, because the IMF will probably be reluctant to put in new bailout money in the coming years, the burden will increasingly fall to Europe, led by Germany, to finance Greece. That will very likely happen directly, through country-to-country loans, and indirectly, through the euro zone’s rescue fund — the European Financial Stability Facility, to which most members of the euro currency union contribute.

As a rule, the IMF does not accept haircuts and insists that its loans are always senior to all other obligations. European politicians, meantime, already under heavy criticism from voters for their countries’ increasing financial exposure to Greece, would have a difficult time explaining why they must take write-offs on some of their Greek debt because Athens still cannot balance its books. And many analysts do expect that Greece will eventually need to ask its public sector creditors to renegotiate its debt.

This deal, the largest debt write-down in history, will provide immediate relief to Greece by cutting back on 15 billion euros, or $19.8 billion, in interest and principal it was paying each year to its private bondholders.

“We do not have the right to waste the money that we will save in interest and debt repayments,” the Greek prime minister, Lucas Papademos, said. But even after the new relief, Greece is still expected to be saddled with a ratio of debt to gross domestic product of 151 per cent in 2012, and 149 per cent in 2013. These debt levels remain the highest in Europe. The Greek economy remains in a wretched state — it shrank by 7.5 per cent in the fourth quarter. And youth unemployment, at 51 per cent, is now officially the highest in Europe.

So it is by no means clear that Athens will be able to generate the cash to service its remaining debt. Analysts differ on the size of the financing gap that Greece will face in the next two years — the sum of money that it will need to fulfill its internal and external obligations. J. P. Morgan, in a research note, put the figure at 20 billion euros, and others have said the amount might be twice that.

There are still loose ends, most notably the remaining private investors who have declined to participate in this deal and could not be forced to do so because their bonds are not governed by the local Greek laws that enabled Athens to strong-arm most of the creditors.

The Greek government said that it had extended the offer to those holdouts to March 23, but that the offer would be withdrawn after that date. Analysts say they expect some holdout investors to sue, but predict that it is unlikely the dissidents will be able to wrangle a better deal, given their fairly small number.

Many analysts say, too, that there may be a benefit to the public sector’s now being Greece’s largest creditor. It might be easier for creditor nations to take collective steps to aid Greece before the next crisis hits, as opposed to trying to persuade a diffuse community of public and private investors, with different interests and agendas, to reach an agreement.

But for Greece, the drawback of owing so much money to Europe and the I.M.F., even at lower interest rates and longer maturities, is that the obligation will always be there.