Specific to Greece, euro-zone official lenders’ debts have been restructured in the forms of lowering interest rates from 5.5% to approx. 3.5% and extension of term from7.5 years to 15 or even 30 years. These have been backed by €109 billion bail-out money, an additional €20 billion for Greek bond buyback and €35 billion ECB collateral for Greek banks. Private creditors, officially recognized as Private-Sector Involvement (PSI) have been given a choice of either of three options – rollover of maturing bonds, swap with longer maturities (both backed by AAA -rated collateral) or secondary market bond buybacks. However, the PSI has been defined to include only ‘voluntary’ and ‘substantial’ creditors, which would lead to a number of lenders being short-changed.
In an attempt to control the contagion effects, the Euro-zone leaders have decided to make the European Financial Stability Facility (EFSF) more flexible, so that it can intervene long before financial crises levels are reached. It will be able to extend short-term lines of credit, recapitalize banks and buy the bonds of vulnerable countries on the secondary market.
Very importantly, the Euro-zone leaders have pledged to provide financial support to all beleaguered members (to the relief of Ireland and Portugal) “until they have regained market access”. Also, the PSI has been ensured support through the members’ “inflexible determination to honour fully their own individual sovereign signature”. And finally, new stabilization tools administered through the greater flexibility of the EFSF have been extended to “finance recapitalisation of financial institutions through loans to governments including in non-programme countries”.
The rating agencies, however are considering declaring ‘selective default’, meaning that some investors will take losses while others may be paid in full.
This has led the financial media take opposing positions on the bail-out plans. With a number of major news agencies and media blogs crying out “default” and decreeing Europe to be “tanking” based on minor Euro movements, while others cautiously approach & breach the issue, with frequent references to “kicking the can about“.
I believe the markets will remain positive in the short-run. Also, with the US Debt Limit and Default issue in the offing, the markets can only be expected to be tumultuous. In the long-run, the bail-out parameters may not bode well for the Euro-zone and the private creditors. Forming the bases of future policies regarding debt and default, a policy of ‘selective default’ may prove unappetizing to credit markets in the long-run. Euro-zone leaders need to sit down and hammer out the kinks in their policies.
A temporary relief from the policymakers of Europe now; but long-term lessons are sure to be learnt from their experiences to come.