Wednesday, July 15, 2015

A Modest Proposal for Reducing Greek Debt

No 'classic' debt forgiveness for the lady
The fault line between German insistence on Greece obeying the rules, which means if you borrow money you pay it all back, and the inability of Greece to pay back all its loans, as outlined by the leaked IMF report, continues.

The Greek parliament reluctantly blessed the deal forced upon the country by the EU and the Troika and now the work starts to flesh it out.

Of paramount interest to Chancellor Merkel is the need to impress on all EU members that they have to stand on their feet if they borrow money, and cannot see the EU as a partnership, with joint assets and income. This means any reduction of Greek debt must be structured to preserve these rules.

The Greek government and the IMF know that there is no hope in hell that Greece can repay all the mountain of debt it raised, using conventional debt repayments.

How to square the circle?

CALLING WALL STREET - PHONE THE PARTHENON:

If the Greeks are  wise, they would be hiring the best brains on Wall Street to fashion wrinkles on debt repayment structures that the Germans can agree to (no classic haircuts, please!) and that preserve cashflow for the Greek nation. 

You can skin such cats in many ways.

Many are huddled in rooms across Europe thinking of ways to do this. What follows is my modest proposal for one way to take a significant amount of the Greek sovereign debt off the table, while meeting the interests of Germany that debt must be repaid, with no “classic” haircuts.

USE THE ZERO COUPON BOND STRUCTURE:

My modest proposal follows.

One structure the Greek government should look at is a simple one that takes some of the cash lent to them and invests it in zero-coupon bonds issued by the German government and pledged by the Greek government to the holders of a portion of its current sovereign debt as security.

The key is that those lenders then agree not to look to Greece for repayment of that secured debt but only to the security of the zero coupon bond issued by the strongest credit in the EU, the German government. This converts existing recourse loans of Greece into non-recourse loans and takes the principal amount off the back of the Greeks.
 
Into the breach a brave man leaped ...

A zero coupon bond is a bond bought at a price lower than its face value, with the face value repaid at the time of maturity. It does not make periodic interest payments. When the bond reaches maturity, its investor receives its face value.

This means the Germans and French and other Eurozone lenders to Greece get a German debt instrument, held in trust according to the laws of (you name it, any tax haven place in the EU except Greece, to keep the Germans comfortable), to secure the extended repayment schedule of the Greek debt.

I would suggest the bullet repayment of the Greek debt that is part of this solution be extended to 50 years, not just 30.

The zero coupon would work because the new (ECB? IMF? other?) loans that are made and are invested in the zero bond security, would bear a nominal and minimal interest rate - say 0.1% (one tenth of one percent).

However, the interest rate on the zero coupon bond issued by Germany would be more like 3% for such a long term bond.

How does it work? The Greek government invests $20 billion in a zero coupon bond issued to it by the German government; the bond is repayable in one lump sum in 50 years time and has a yield to maturity of 3%. In year 50 the sum of $100 billion is paid by Germany to the trustee, who turns around and pays it to the holders of $100 billion of current Greek debt in full and final repayment of that debt.

The $100 billion of current debt that is now converted from debt owed by Greece into debt solely secured by the zero coupon bond pleged to these lenders; it is no longer Greek debt and so reduces the total Greek debt immediately by the $100 billion; nor does this non recourse debt earn earn interest (as the IMF is recommending in its new report).

So $20 billion now wipes out $100 billion of current Greek debt.

But where does Greece get that $20 billion to invest in the German zero bond?

I suggest they look at two sources: a new loan for half that amount, from the ECM (low, low interest and repaid as a bullet in 30 to 50 years) and using half of the asset privatization amount of Euro 50 billion the EU tabled this week.

LONG BULLETS:

I also expect Greece to get long term bullet repayment terms (up to and perhaps over the 30 years the IMF report mentions) for a big chunk of the total sovereign debt. I also expect interest rates to be slim to zero on the outstanding amounts. The Germans will, I think, go for this because it allows the fiction of non-haircut to remain on the table. And that is true, if you don't present value the long term repayments!

CLAWBACKS BY LENDERS IF GREECE BOOMS:

But it would not surprise me if the Germans demanded accelerated repayments (clawbacks) at earlier dates of the postponed repayments of principal if the Greek economy rebounds for some agreed number of years and Greek government coffers are filled with cash that can be used for this.

This the Greek government can agree to if it negotiates the trigger for earlier clawbacks as having a growth test: if growth of the Greek GDP equals the median or average GDP growth of the Eurozone nations, over say a 10 year period, then agreed earlier repayments of such debt (clawbacks) can snap into place, provided they are not so high that Greece cannot sustain the expansion of its economy.

Best of luck to the birthplace of our Western democracy!

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