Wednesday, 26 May 2010 03:07

What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates

In "With the Euro Disintegrating, You Can Calculate Your Haircuts Here",  I explicitly illustrated the likely loss to principal of sovereign debt investors who would be forced to take haircuts "for the cause". While we fully stand behind the calculations and the logic, chances are several sovereigns may attempt to undergo sleight of hand in order to placate investors as best they can. We suspect we will soon be hearing of significant restructuring plans in the Eurozone, starting with Greece. The piece below expands on these thoughts and offers subscribers live spreadsheets that illustrate the potential repercussions. It is recommended that these scenarios be taken into consideration in light of the info offered in the post "Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!" and compared to the haircut analysis as well.

Greek Restructuring Scenarios

There are several precedents of sovereign debt restructuring through maturity extension without taking an explicit  haircut on the principal amount, and many analysts are predicting something of a similar order for Greece. This form of restructuring is usually followed as a preemptive step in order to avoid a country from technically defaulting on its debt obligation due to lack of funds available from the market. It primarily aims to ease the liquidity pressures by deferring the immediate funding requirements to later periods and by spreading the debt obligations over a longer period of time. It also helps in moderating the increase in interest expenditure due to refinancing if the rates are expected to remain high in the near-to medium term but decline over the long term.

However, the two major negative limitations of this form of restructuring if applied to Greek sovereign debt restructuring are –

  • It solves only the liquidity side of the problem which means that the refinancing of the huge debt (expected to reach 133% of GDP by the end of 2010) will be spread over a longer time period while the debt itself will continue to remain at such high levels. The sustainability of such high debt level, which is growing continuously owing to the snowball effect and the primary deficit, is and will continue to be highly questionable. Greek public finances are burdened by a very large interest expense which is approaching 7% of GDP. The government’s revenues are sagging and the drastic austerity measures need to first bridge the huge primary deficit (which was 8.6% of GDP in 2009), before generating funds to cover the interest expenditure and reduce debt.

Thus, even though the amount of funds required each year to refinance the maturing debt will be reduced by extending maturities, the solvency and sustainability issues surrounding Greece’s public finances, which were the primary reasons for it’s being ostracized from the market in the first place, will remain unanswered.

  • It will lead to decline in present value of cash flows for the creditors since the average coupon rate is lower than the cost of capital (reflected by the yields on the Greek bonds). The average coupon rate for bonds maturing between 2010 and 2020 is about 4.4% while the average benchmark yield for bonds with maturities from 1-10 years is nearly 7.5%. Also, as the maturity of the debt is extended, the risk increases and so does the cost of capital.

In order to assess the effectiveness of this form of restructuring for Greek sovereign debt, we have built three scenarios in which the maturities of the Greek debt is extended. These scenarios weren’t designed to be exact predictions of the future but to represent what may happen under a variety of highly likely scenarios (a pessimistic, base and optimistic case, so to say):

  • Restructuring 1 – Under this scenario, we assumed that the creditors with debt maturing between 2010 and 2020 will exchange their existing debt securities with new debt securities having same coupon rate but double the maturity.
  • Restructuring 2 – Under this scenario, we assumed that the creditors with debt maturing between 2010 and 2020 will exchange their existing debt securities with new debt securities having half the coupon rate but double the maturity.
  • Restructuring 3 – Under this scenario, the debt maturing between 2010 and 2020 will be rolled up into one bundle and exchanged against a single, self-amortizing 20-year bond with coupon equal to average coupon rate of the converted bonds.


In all the three scenarios, we computed the total funding requirements and compared the same with funding requirements prior to restructuring. It is observed that restructuring will help in easing the immediate pressure of procuring funds to meet the huge funding requirements lined up in the next 5 years. However, it will also lead to substantial loss to creditors in the form of erosion of present value of cash flows. (Discount rate was the benchmark yields of Greek government bonds for similar maturity period).

Professional and Institutional level subscribers (click here to upgrade) may access the live spreadsheet behind the document by clicking here (scroll down after for full summary, spreadsheet and charts).greek debt restructuring spreadsheet

We will be running similar restructuring analysis for all of the PIIGS member that we have researched in the Pan-European Sovereign Debt Crisis series.

Last modified on Friday, 28 May 2010 04:49


  • Comment Link Fliujniligui Sunday, 30 May 2010 09:33 posted by Fliujniligui

    GGB portfolio is detailed on page 9.
    Capital position is on page 6 and is also shown on page 4 than tangible equity it at 4.2 billions.

    So if there is default, There is 2.1 billions writedown on 4.2 billions bonds and tangible equity drops at 2.1 billions too. Market cap is 2.484 billions Euros. Alpha messed a bit since in previous results the GGB toxic bonds were just at 2.8 billions and this enabled market cap to stay under tangible equity.

    They seem to be of the opinion that Greece can do the SGP and avoid default if they are hoarding Greek bonds at these level. They present the Greek disaster on page 5. That debt seems to be going to stabilise at 150% of GDP but they are better really kick in some FDI incentives and reduce business execution complexity because they must count more on GDP growth to reduce debt/GDP than rely uniquely on paying debt which will be very very long. So ideally wait for 4 Euros to buy this stock so market cap really reaches tangible common equity post-50% hit.

  • Comment Link Reggie Middleton Sunday, 30 May 2010 07:47 posted by Reggie Middleton

    Interesting. Send me a spreadsheet whichbjustifies that , taking levereage and explicit holdings into consideration and I will post it.

  • Comment Link Fliujniligui Saturday, 29 May 2010 14:57 posted by Fliujniligui

    Alpha Bank can absorb 50% writedown on Greek debt and this would bring its tangible common equity in line with its current depressed market capitalization.

  • Comment Link Pkpetro Saturday, 29 May 2010 09:18 posted by Pkpetro

    Use GIPS or GIIPS AND PIIGS, if you want to be decent.

  • Comment Link Reggie Middleton Thursday, 27 May 2010 08:10 posted by Reggie Middleton

    You seem to confuse math with bashing. Feel free to buy some Greek bonds today if you want to invest.

  • Comment Link Fliujniligui Thursday, 27 May 2010 07:59 posted by Fliujniligui

    It is time to invest in Greece. They implement austerity measures and bashers like you are so abundant that it may just be another contrarian buy signal. Interesting. Blood runs the street and you are telling us not to invest ?

  • Comment Link Reggie Middleton Wednesday, 26 May 2010 15:10 posted by Reggie Middleton

    Others are now jumping on the defualt vs restructuring bandwagon...

  • Comment Link Reggie Middleton Wednesday, 26 May 2010 15:05 posted by Reggie Middleton

    if there was any doubt this farce would collapse under its own absurdity, simply read this Reuters release:

    the ink is not even dry on the IMF/eu agreement and a Greece is already trying to renegotiate it. in the post Lies, liars and sovereign truths I believe I demonstrated how both the eu and the IMF are lacking in credibility. if they fold here then there is no reason to have any faith that EU will be able to effect any stringent austerity mesas at all.

  • Comment Link shaunsnoll Wednesday, 26 May 2010 10:30 posted by shaunsnoll

    Makes it all the more plausible since <10% of greek debt is actually held by Greeks. I doubt they'll bail out greece too as doing so would punish Ireland for its discipline.

    There is also plenty of historical precedent of pushing out maturities and lowering coupons at the same time.

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