23/03/2012
Greece bailout: doubts remain despite largest government debt restructuring in history
By Neil Hodge
On 8 March, holders of Greek debt agreed the largest government debt restructuring in history, and the world’s largest ever liability management transaction. The aim is to cut the Greek government's debt from 160 per cent of GDP to a little over 120 per cent of GDP by 2020.
The European Union and International Monetary Fund said Greece would only get its latest bailout of €130bn if the debt swap went through. So far, the deal involves €172bn worth of debt, with investors taking a total loss of up to 74 per cent. This should cut €107bn from Greece's total government debt.
Inevitably the UK’s magic circle law firms played a key role in advising debt holders, and they look set to continue acting on behalf of creditors and the Greek government for some time.Linklaters and Allen & Overy (A&O) have both taken roles in the latest bailout agreement, with Linklaters advising Deutsche Bank and HSBC.
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Excerpt from webcast interview with Chris Saul (2:12) |
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‘...I would agree with the market’s assessment that at some stage there will need to be more "therapy"...'
Chris Saul
Senior Partner, Slaughter and May
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US firm Cleary Gottlieb Steen & Hamilton also took an important role, advising the Greek government.
A&O’s special global counsel, Philip Wood, a member of the IBA Task Force on the Financial Crisis, said:
‘Regrettably, we are not in a position to say anything at all during the public offer process until it closes for regulatory and other reasons. This is because the Greek public offer has been published so we are locked up until it closes, which is scheduled for 11 April.’
However, assessing the implications of the latest Greek deal, Slaughter and May’s senior partner Chris Saul, speaking during a recent IBA webcast, said (see video clip above):
‘On the wider question of, where goes the eurozone, I think we’re at a very interesting stage; we’ve just had the Greek deal done, and the real issue is, is it problem solved? Where do we go next? What happens?’ Saul’s firm has, in the past, advised Greece’s Ministry of Finance regarding provision of loans by other EU Member States.
Asked if he agreed that investors appear to be saying Greece will have to come back for yet another restructuring, Saul said: ‘I would, because…there’s been a 70 per cent haircut for the bondholders, and there’s a built-in further haircut in the nature of the instruments that they’ve taken, so it’s more than 70 per cent in reality, and yet you’ve still got 120 per cent debt-to-GDP ratio within Greece.
'And therefore, to be honest, it seems hard to think that that has sorted it out for Greece, so I would agree with the market’s assessment that at some stage there will need to be more therapy, if you like.’
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‘The eurozone needs stability and the EU needs to restore investor confidence, and this agreement should provide more time'
Roger McCormick
London School of Economics
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He added: ‘I think the critical point is: can Greece really deliver growth for its citizens if it’s in the euro, or is that just too expensive a currency, and do they need to go back to the drachma or another currency in order to stimulate exports? That’s the big question.’
Nevertheless, experts believe the deal will provide additional breathing space to build stronger firewalls around other highly indebted eurozone countries such as Italy and Spain.
‘It was vital for Greece to get creditors to accept a bailout deal. The eurozone needs stability and the EU needs to restore investor confidence, and this agreement should provide more time,’ said Roger McCormick, visiting professor at the London School of Economics and a member of the IBA’s Task Force on the Financial Crisis.
However, the debt crisis persists amid a vicious cycle of fiscal austerity and recession. ‘There was no Plan B,’ says Jonathan Chia Croft, chief investment officer at investment firm AdviCorp. ‘Creditors effectively had a short window of opportunity to agree something, which saw them get at least some of their money back,’ he adds.
‘Everyone just hopes that investors will swallow the medicine, accept the deal and move on,’ says Dr Steven McCabe, director of research degree programmes at Birmingham City University’s Business School. ‘No one really expects to get any of their money back anyway,’ he adds.
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The bailout is conditional on further austerity measures |
The Greek bailout is conditional on the country implementing a further round of austerity measures. The government is pushing through spending cuts equal to 1.5 per cent of its output, including cuts in pensions and civil service job cuts.
It has also been told to make its economy more competitive by cutting the minimum wage and making labour markets more flexible.
However, the 120 per cent target is entirely arbitrary, say economists: such a GDP to sovereign debt ratio is still unsustainable, but trying to cut any further throws a spotlight on another eurozone country that is struggling to contain its ballooning debt crisis – Italy – whose debt is also 120 per cent of its GDP.
‘No one wants to confront the possibility of trying to deal with another major bailout at the moment,’ says Martin Koehring, an economist at the Economist Intelligence Unit. ‘So far, Italy’s debt problem has not caused too many market jitters, and the EU wants to limit the problem to Greece,’ he adds.