Tuesday, January 3, 2012

Remember How Greece’s Problems Were Fixed by Creditors Taking a 50% Decrease in the Value of Greek Debt?

Neither Does Anyone Else

Now that the old year is over and the New Year is beginning everyone can get back to last year’s problems, which unfortunately were not solved last year.  As far as Greece was concerned, everyone thought they would be solved.  Private creditors “voluntarily” agreed to take a 50% reduction in the value of their Greek bonds, which would reduce Greece’s debt and that along with austerity and economic reform would fix Greece.

Well the austerity part is working.  The International Monetary Fund has these predictions for the Greek economy.

The fund said in a report prepared last month that if a 50% write-down was universally subscribed by private holders, Greece's debt could reach a long-term sustainable level of around 120 percent of gross domestic product. Then, it expected for Greece's economy to contract by 5.5% this year and 3% next year

But like all good forecasters and policy makers, the IMF hedged

It warned, however, that "Results remain sensitive to growth outcomes ... and even small deviations from the macro and program targets would not bode well for debt sustainability."

A "low-growth case would produce an unsustainable outcome," the IMF said then.

 And now the IMF is getting ready to harvest that hedge

The International Monetary Fund recently told the Greek government that a worsening economic outlook suggests the beleaguered nation may be unable to reduce its debt to sustainable levels even with a planned 50% write down in privately-held Greek government bonds, according to two officials familiar with the conversations.

"A 50% haircut may no longer be enough" to bring Greece's debt to sustainable levels given the new IMF economic forecasts, said one of the officials.

An official at the IMF confirmed staff are working on starker economic assessment than outlined last month in its loan-program review for the country. Some IMF officials think "the debt sustainability analysis is not valid anymore" under the new economic forecasts, the official said. For Greece's debt to be sustainable now "requires either a deeper haircut or additional loans from Europe," he said.

Well anyone who thinks that there will be additional loans from Europe also thinks that Donald Trump is Presidential material.  As for the private lenders, well, their holiday season got a whole lot worse.

Private creditors are hoping to soon conclude negotiations with Greek officials on the details of a planned debt-reduction program. In late October, euro-zone governments called on Greece to secure a 50% writedown on the debt held by private creditors as a condition for payouts under the existing €130 billion ($168.49 billion) bailout package to continue. The debt deal was also seen as essential for any potential expansion of the program.

So the private lenders will soon have the worst of all worlds, they will take a huge write down in the value of their assets that are comprised of Greek government debt, and that write down won’t even fix the problem.

Of course, how a country whose economy is contracting at a rate of 5.5% can be expected to be better rather than worse able to pay its debts is something that only happens in miracle stories.  And this holiday season, that’s not the miracle that is going to happen.

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