Greek Bailout May Include Larger Writedowns for Private Investors
European leaders have hinted that bondholders may incur bigger losses on Greek debt than originally expected. European finance ministers were targeting bondholder losses of 21% in July when shaping a deal that foresaw private sector investors contributing 50 billion euros to a 159 billion-euro rescue plan through debt exchanges and rollovers.
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“As far as [private sector involvement] is concerned, we have to take into account that we have experienced changes since the decision we have taken on July 21,” said Luxembourg Prime Minister Jean-Claude Juncker, speaking to reporters early today after chairing a meeting of European finance chiefs in Luxembourg. “These are technical revisions we are discussing.”
Juncker gave no details about a possible restructuring of the “voluntary” debt exchange to be part of Greece’s second bailout package. The debt swap, which is still being negotiated, is expected to amount to a writedown of 21%, according to the Institute of International finance industry group. When asked about the possibility of deeper writedowns, Spanish Economy Minister Elena Salgado told reporters today, “No, no…I insist: no.”
European leaders have been going back and forth on whether to include further writedowns on bond contracts in the new aid package. Seven countries, including Germany, the 17-nation euro zone’s largest economy, have considered calling for Greek writedowns as much as 50%, but discussions are still ongoing.
European finance ministers have also pushed back a vote on whether to release Greece’s next 8 billion-euro loan installment, the sixth from its first aid package, until October 13. The vote was originally scheduled for yesterday.
“The endgame for Greece has now begun,” said Sony Kapoor, managing director of policy group Re-Define Europe. “It seems that the ground is being laid to revisit the private sector involvement agreement reached in July.”
On October 2, the Greek cabinet announced 6.6 billion euros of new spending cuts in order to meet the terms of its original bailout agreement. However, Greece’s new budget has revised its deficit goal for 2011 to 8.5% of GDP, compared to the 7.6% target set out by its troika of lenders. Prime Minister George Papandreou said they were unable to meet targets because the recession was worse than expected. The Greek economy is now expected to contract 5.5% by the end of 2011, compared to a 3.8% contraction as predicted in May.
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Despite Greece’s failure to meet what were considered hard-line targets required by its lenders to receive its next payout, Juncker said he is “nevertheless optimistic when it comes to the issue of disbursement” by the end of October. In the meantime, Juncker said that Greece would be able to pay its bills.