Galery

1

Seven scenarios for the inevitable as it seems restructuring of the Greek foreign debt were presented in the report of the international law firm which was published in today's edition of the Greek newspaper To Vima. The author of the article presents the essence of each one of the options with their advantages and disadvantages.

The scenario, which the representatives of the European Union, International Monetary Fund and European Central Bank support with their official statements provides that after the implementation of the Memorandum Greece will be able to hit the financial markets if not in 2012, at least at the end of the economic program in 2013. Under this scenario, the financial progress of the country and the accompanying structural changes will allow it to take more loans from financial markets at normal interest rates.

But if one takes into account the fact that in 2013 Greece's foreign debt will be around or above 160 percent of the gross national product it will be very difficult to convince the markets about its sustainability. This scenario provides for the implementation of stringent economic measures for another two years, which would call into question the stability of the political system. It is not clear however what will happen if Greece fails to meet the terms of the memorandum. Whether the European Union and the International Monetary Fund will mitigate the criteria so as to grant the aid tranches or German Bundestag will instruct the government to show a tough stance? And in case mitigation of the criteria is allowed will it apply for Ireland and Portugal as well, which have the same problems? Last but not least, the question arises about what will happen if the other two member states of the Eurozone also decide to restructure their debts, since the Greek example shows that the memorandum does not guarantee success.

In any case, in case Greece decides to deal with its foreign debt before 2013 it must first have secured the agreement of the European Union and International Monetary Fund, because during their meeting in Deauville Angela Merkel and Nicolas Sarkozy agreed that there will be no restructuring before that date. This obstacle can be overcome if the restructuring happens voluntaryly, i.e. with the consent of the creditors.

Another solution is to be offered to the bonds holders from the private sector, mainly banks from northern Europe to accept the extension of the period of payment of their bonds. In this way the cuts and changes in the nominal value of securities will be avoided. In this way they will avoid losses. The so-called reprofiling was done in 2003 in Uruguay. In order to attract as many creditors as possible they will be given the opportunity to exchange their bonds with new ones that will be guaranteed by the European Union or the International Monetary Fund, similarly to the Brady bonds. Thus the money from the aid worth 110 billion euros that will not be used for payment of the bonds may be infused into the market or included in the repayment of the debt.

However with this solution again it is not clear whether it would contribute to the sustainability of Greek foreign debt because the government will be obliged to continue efforts towards fiscal consolidation and achievement of primary surplus and implement the privatization program worth 50 billion euros for the debt reduction.

The last option is to completely restructure the debt before 2013 in order to make it sustainable as quickly as possible for it to enable Greece to discharge this burden. Such restructuring includes significant cuts and parallel with this extension of payment terms to make progress in fiscal consolidation and for the country be able to return to the financial markets after several years. In this case, it must reject the idea of ​​voluntary restructuring and find another way to achieve it. It can happen if for example Greece claimed that it could not pay the expiring bonds. On the other hand, European leaders who spent the millions of euros  collected from the taxpayers in their countries in order to avoid debt restructuring of one of the countries member of the eurozone will have to switch to the opposite extreme. Currently, Europe does not seem ready to do it. Such a development would have a huge impact over Portugal, Spain and other member countries from the periphery of the eurozone.

If Greece manages to come back to the markets in 2013, when the program of economic policy expires, the scenarios for what may follow are a several. Three of them are related to debt restructuring and the fourth involves continuous financial "injections" and custody of the country by the European Union and International Monetary Fund for an indefinite period of time.

At the end of the memorandum in June 2013 about one third of Greek foreign debt will be passed to the European Union and the International Monetary Fund. A large part which now reaches 50 billion euros will be at the European Central Bank. If this part is restructured the debt will be manageable and Greece will be able to return to financial markets. From a political perspective it is considered, to be very difficult if not impossible that these amounts are paid only by taxpayers, without any involvement of the banks, investment capital and financial system.

The scenario for the restructuring of the loans of the private sector provides for significant cuts in the bonds of private owners. But even the complete cancellation of the obligations of the private sector does not guarantee the return of Greece in the markets because the country will be considered insolvent as it will have violated its obligations. The consequences from the losses will affect the European banking system and the authority of the Eurozone, which will have repercussions in the prices of loans to other countries.