Jason Gaywood, consultant at currency specialist HIFX comments on the biggest ever sovereign debt restructuring:
“So far, European currency and equity markets have shown little reaction to the overnight news from Greece that nearly 86% of its domestic debt holders have agreed to a ‘swap’ which amounts to the biggest ever sovereign debt restructuring. Bondholders will now receive as little as 26% of face value.
“The take up of this deal which is widely seen as ‘the least bad option’ means that Athens can force the majority of remaining dissenters to take the deal by enforcing retroactive Collective Action Clauses.
“So, what does this actually solve and what was the real motivation for the deal? The overall aim is to cut Greek government from 160% to just over 120% by 2020. Whether this aim is achieved or not, only time will tell. However, 120% of GDP is still a level of debt that may be described as unsustainable and with Greece in its fifth year of recession and facing extreme austerity for the foreseeable future, it is very difficult to see how Athens can steer a course back to prosperity from here.
“With regard to motivation, the repeated measures being thrashed out across the EU appear to be far more politically motivated than borne out of recognised economic sound thinking. This debt swap and the recent flooding of EU banks with a trillion cheap Euros smacks of a desperate face saving attempt by EU politicians to keep the increasingly Frankenstein like Eurozone patient alive. The irony of the Greek deal is that the haircut is likely to trigger insurance payments to some international bond holders. These payments will be levied against, among others, already embattled Spanish and Italian insurance companies who would not survive if it wasn’t for the aforementioned ECB bailout — this sounds remarkably like robbing Peter to pay Paul.
“Sadly, most commentators recognise that Greece is probably past saving within the Euro. In order to survive, Athens needs to be cut free of its economic shackles, devalue its currency and gradually trade its way out of a hole. However, political leaders elsewhere in the Eurozone who are facing domestic elections this year or perhaps head a weak coalition government are motivated more by short term political well being rather than the economic wellbeing of The EU as a whole.”