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Mon February 20, 2012
Bondholders To Take A Hit In Greece Bailout Plan
European finance ministers are expected to vote on the latest $171 billion bailout package for Greece Monday. The package needs to be approved so Greece can make payments on bonds that come due a month from now. Even if the bailout is approved, it is likely to be only a temporary solution to Greece's troubles.
Across the Atlantic in New York, Hans Humes likes to ride his bike from his home in Brooklyn to his office at Greylock Capital Management in Manhattan. On a recent morning he showed up for our interview still carrying his bike helmet.
"I was thinking as I came in this morning, when you start getting a traffic jam, if every car in the traffic jam had its priorities as the ultimate priority, you'd have a smashup pretty quickly," Humes said.
And he sees that as something of a metaphor for what's happening in Europe right now. Humes represents some of the big institutional investors who bought billions of dollars worth of Greek government bonds.
He's been involved in debt talks before, and was part of the Argentine debt restructuring almost a decade ago. But the Greek quagmire is much more complicated because it involves so many more parties: the International Monetary Fund, the European Union plus all of the governments in the eurozone — each with its own agenda. Thus the traffic jam metaphor.
"You've got sort of 17, 18 cars driving along in the Greek restructuring, and to some extent I feel that everybody's priorities, the decision makers are for their institutions and they're kind of losing sight of what the real mission should be here," Humes added.
But the clock is ticking, and Greece's growth rate keeps slowing — making it even harder to pay off its debts.
"The problem is we're trying to adjust to this new data that's coming in and that's a result of obviously economic activity dropping but that in itself is a result of the fact that there hasn't been an accord, there's been no resolution to this," Humes said.
Under the plan now on the table, the investors represented by Humes will have to swap their bonds for new ones worth half as much. And because the new bonds will be of longer duration than the ones they now hold, they're worth even less.
Bondholders could end up taking a hit of 70 percent. Some of them may decide not to go along with the deal. But they risk pushing Greece into default. And Humes says in the end they don't have a lot of leverage if Greece decides not to pay them.
Germany and the IMF, meanwhile, are demanding more budget cuts from Greece. In that traffic jam analogy he says Germany is a tractor-trailer that has to move before anyone else can.
Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics, believes the different parties can ultimately reach an agreement that enables Greece to meet its March 20 deadline.
"Everyone's going to try to work something out and I think something will happen," Subramanian said. "The bigger question is: Even if they work it out, is there light at the end of the tunnel?"
Subramanian notes that more bond payments will be due in June. And even if Greece meets these deadlines and implements the austerity program that is being forced on it, the IMF now estimates that it will still have sky-high debt levels by 2020.
"It's almost inevitable there will be more debt relief if Greece has to come out of it," he says. "So the question is: whether in the long run, this is enough? And I think the answer is far from clear."
But these are long-term questions. The aim right now is to come up with a bailout plan that will enable Greece to make payments on debt that comes due March 20th. If Greece can't do that, it will touch off the kind of crisis the markets have been working so long to prevent.