Transcript The 2012 Greek debt restructuring: how it happened and what it means Presentation at PEFM Seminar St.

The 2012 Greek debt restructuring:
how it happened and what it means
Presentation at PEFM Seminar
St. Antony’s College, Oxford
11 November 2013
Jeromin Zettelmeyer*
EBRD, PIIE and CEPR
with Christoph Trebesch (LMU Munich and CESIfo)
and Mitu Gulati (Duke University)
*Strictly personal views
Outline
1.
A brief history of the Greek debt restructuring
•
2.
how did we go from denial to historic bond exchange to
buyback of the new bonds?
What were the distributional implications?
•
creditors vs. Greece; but also inter-creditor distribution
3.
How was the collective action problem addressed?
4.
Was Greece’s December 2012 buyback a “boondoggle”?
5.
Assessment and implications
•
Was the restructuring necessary?
•
Could it have been handled better?
•
Could it serve as a template for future restructurings?
Twists and turns of the Greek restructuring saga
1.
May 2010 package: combination of large-scale financing and
massive adjustment; no debt reduction
2.
July 2011 package: increases both financing envelope
(including through PSI) and required reforms/adjustment.
• “Private sector involvement” w.r.t. financing (planned extension of
maturities beyond 2020), but no debt relief.
3. October 2011 Eurogroup decision to carry out deep
restructuring (50% face value reduction).
4. March-April 2012 debt exchange carrying out that decision
(more or less); retires €200bn in bonds in exchange for €30bn
quasi-cash (short term EFSF notes) and €56bn new bonds
5. December 2012: buyback of €32bn of new bonds using €11.3 in
cash borrowed from the EFSF
How did we get there?`
1. Notwithstanding significant initial adjustment
structural reforms do not take off
2. The October 2010 “Deauville beachwalk”
3. Greater than expected output decline,
unemployment, social and political stress.
4. Dwindling prospect of regaining market access
5. By May 2011, a sense that contagion could be
contained
6. Unwillingness of Germany/IMF to provide extra support
without some (July) or very deep PSI (October 2011)
The end-result: debt reduction, but also a
massive transformation of the debt structure
T-Bills
15.0
Privately
held
Bonds:
205.6
Holdouts,
5.5
EU/EFSF
52.9
T-Bills;
New 23.9
ECB/
NCBs
56.7
IMF, 20.1
Before (Feb 2012):
• about €350 billion FV
• Mostly owed to
privately creditors
Bonds
29.6
2012
restructurings
IMF 22.1
ECB/
NCBs;
45.3
EU/
EFSF:
161.1
After (end-2012):
• about €287 billion FV
• 80 percent owed to
official creditors
Note: Charts show sum of bonds, T-bills and EU/IMF debt, some smaller sovereign debt items not shown.
Outline
1.
A brief history of the Greek debt restructuring
•
2.
how did we go from denial to historic bond exchange to
buyback of the new bonds?
What were the distributional implications?
•
creditors vs. Greece; but also inter-creditor distribution
3.
How was the collective action problem addressed?
4.
Was Greece’s December 2012 buyback a “boondoggle”?
5.
Assessment and implications
•
Was the restructuring necessary?
•
Could it have been handled better?
•
Could it serve as a template for future restructurings?
Distributional implications: private creditors
vs. Greece
1. Present value “Haircut” (percentage loss of creditors): 59-65%
•
•
Lower than headline figure of >75 percent claimed by
creditors
Difference due to methodology: need to compare PVs of
new and old bonds, not PV of new with face value of old.
2. Debt relief to Greece: 51-55 percent of GDP
•
•
This is net of bank recapitalisation costs.
Much larger than Argentina (2005) and any other modern
private sector debt restructuring.
 A historically large transfer from private creditors to Greece
Computing “haircuts” (PSI-related creditor losses)
(in percent of outstanding principal)
Discounting approach 1/
Uniform discount rate
15.3
16.3
18.7
“Curve”
Value of new securities received (PVnew)
23.1
22.5
21.2
22.8
Haircut in market definition (100-PVnew)
76.9
77.5
78.8
77.2
Value of old bonds (PVold)
65.3
63.3
59.0
56.5
Present value haircut 100*(1-PVnew/PVold)
64.6
64.4
64.0
59.6
1/ Used for discounting payment streams of both new and old Greek government bonds.
For EFSF bill present value of 15 is assumed. GDP warrants valued at 0.3 percent of
outstanding principal.
How tough was haircut in historical comparison?
100
Fourth largest haircut among since 1975 (except for HIPCs)
YEM
BOL
TGO
NIC
ETH
SEN
MOZ
STPSLEMRT BIH GUY
GUY
ZMB
UGA
GIN
NER
ALB
IRQ COG
TZA
CMRCMR
HND
ARG
BOL
HND
CRI
SRB
ECU
PERCIV
POL
NIC
0
50
MEX
BGR
JOR
MDG
VNM RUS
RUS
DOM
DOMMOZ
CUB
GMBCOD
POL
NIC
RUS
NER TGO
KEN
CUB
JAM
CUB
PHL
PHL
ECU
NIC
NGA
POL CRIMDG
MARNGA
ECU
CODNERCODPOL MWI
VEN
LBR
SEN
CRICOD
PAN
MKD
ROU
ARG
ROU SEN
JAM
CHLJAM
MEX
CODARG
NGA
COD
BRA
PRY
SEN
MWI
POL
COD
URY BRA
RUS
NIC
GIN
PHL
URY POL
MAR
DZA
TUR
ZAF
ARG
MAR
URY
SRB
TUR MDG
NGA
BRA
BRA
MEX
UKR
TUR JAM
CHL
GAB
TTO
ECU
PHL
JAM
PAN
UKRPAK
SRB MDG
CHL
ZAF
ROU
PAN
POL
PAK
HRV UKR
VEN
DZA
TUR
ZAF
CHL
GAB
SRB
PER
ECU
ECU
MEX
VEN
JAM
SVN
JAM
MEX
NGA
BRA
NGA
URY
CHL
MEX
NGA
PER
SRB
UKR
BRA
POL
SDN
MDA
GRC
SYC
CIV
MDA
GRD
BLZ
URY
DOM
DOM
1975m1 1980m1 1985m1 1990m1 1995m1 2000m1 2005m1 2010m1
Short maturities hit much harder than long end
•
Consequence of one-size-fits-all offer (no menu) and low
coupon rate on old bonds compared to exit yields
Bond-by-bond haircuts using uniform 15.8% discount rate
90
80
70
60
50
40
30
20
10
0
0
2
4
6
8
10
12
14
remaining duration (years)
16
18
20
22
Computing debt relief
Old liability
Assumed discount rate (percent)
3.5
5.0
8.0
15.3
Value of €199.2 bn in old bonds
217.2
199.5
171.9
130.1
Value of €61.4 new bonds
61.9
49.8
33.6
15.7
Value of €29.7 bn EFSF PSI sweetener
31.4
25.3
17.2
8.2
Value of €25 bn EFSF bank recap loan
Present value debt relief net of recap costs
€ billion
per cent of GDP
25.7
21.5
15.3
7.6
99.2
51.2
103.7
53.5
106.4
54.9
98.9
51.1
New liabilities
Historically high debt relief
Combination of high debt relief in percentage of PV of old debt
and large outstanding debt volume as a share of GDP
Restructuring
Episode
Investor Debt relief Volume
GDP
Debt relief
(% GDP)
Haircut
(percent)
(€mn)
(€mn)
Russia, 2000
52.6
33.2
21759
196302
3.7
Ecuador, 2000
28.6
24.8
4826
12050
9.9
Argentina Phase 1, 2001
40.5
30.8
31537
203097
4.8
Argentina, 2005
75.0
70.9
47090
138468
24.1
Uruguay - External, 2003
13.4
-5.3
2294
17251
-0.7
Uruguay - Domestic
2003
22.3
0.0
1209
17251
0.0
Greece, 2012
64.6
52.0
199210
193750
53.5
Source: Sturzenegger and Zettelmeyer, 2007, except Greece; authors' calculations (Greece);
WEO, Eurostat
Outline
1.
A brief history of the Greek debt restructuring
•
2.
how did we go from denial to historic bond exchange to
buyback of the new bonds?
What were the distributional implications?
•
creditors vs. Greece; but also inter-creditor distribution
3.
How was the collective action problem addressed?
4.
Was Greece’s December 2012 buyback a “boondoggle”?
5.
Assessment
•
Was the restructuring necessary?
•
Could it have been handled better?
•
Could it serve as a template for future restructurings?
How the free rider problem was addressed
Quite differently from the typical bond exchanges of the 1990s
and early 2000s (e.g. Ecuador, Argentina):
1. More reliance on formalised negotiations with a creditor
committee consisting mostly of large institutions susceptible
to official influence and peer pressure
2. Much less reliance on threats of non-payment
•
Avoided almost entirely (until the last minute)
3. More reliance on CACs
•
“retrofitted” onto domestic law debt via act of parliament,
66% majority threshold across all domestic bonds
4. Much more reliance on “sweeteners”: cash, and a seniority
upgrade.
“Carrots”: make new instruments as safe and
liquid as possible
1. 15% of old principal in short term EFSF bonds
•
Quasi-cash, made up 2/3 of the new value received!
•
The largest cash sweetener ever offered in a restructuring
2. New bonds issued under English law with usual creditor
protections.
3. “Co-financing agreement” governing new bonds:
• Enshrines pro-rata repayments to EFSF (w.r.t. PSI related
repayments) and new bondholders
• EFSF agreement needed for changes in payment, new
bond issuance beyond a ceiling of 90 billion
Summary: how Greece got to 97% participation
1. Official + peer pressure on large regulated institutions:
→perhaps 50-60% of domestic law debt
2. Plus: combination of “carrots” and “sticks” (non-payment
threats) →83% of domestic law debt (>> 66% CAC threshold)
3. Plus: domestic aggregate CAC triggered:
→100 percent of domestic law debt
4. Foreign law instruments: 61% participation rate before CACs
(so must reflect pressure, carrots, sticks), 71% after CACs.
Upper axis: per cent of domestic law debt
60
0
Official and peer pressure (P)
0
83
CACs
(foreign
law)
100
“Carrots” (C) and Domestic P&C&S
“Sticks” (S), dom. CAC - foreign
Lower axis: per cent of total eligible debt
86
97
Outline
1.
A brief history of the Greek debt restructuring
•
2.
how did we go from denial to historic bond exchange to
buyback of the new bonds?
What were the distributional implications?
•
creditors vs. Greece; but also inter-creditor distribution
3.
How was the collective action problem addressed?
4.
Was Greece’s December 2012 buyback a “boondoggle”?
5.
Assessment and implications
•
Was the restructuring necessary?
•
Could it have been handled better?
•
Could it serve as a template for future restructurings?
Boondoggle alert: sharp rise in Greek debt price
ahead of buyback
Price of Greek government bonds
Buyback
50
45
Asmussen statement
Buyback announced
40
35
30
25
20
15
10
5
2023 bond price
2042 bond price
0
• Caveat: price rise may also reflect anticipation of resumption in
programme lending, improved official lending terms
Numbers suggest no boondoggle, but
additional debt relief was small
1. Buyback passes “boondoggle” test: reduction in market
value of debt exceeds PV increase in EFSF debt.
2. Debt relief: 6-11 per cent of 2012 GDP (difference
between PV of retired and additional EFSF debt, using
3.5-8 percent discount rate)
3. But good use of taxpayer money? Probably not. For
example, debt relief could have been higher if buyback
had been conducted at negotiated pre-buyback prices.
Outline
1.
A brief history of the Greek debt restructuring
•
2.
how did we go from denial to historic bond exchange to
buyback of the new bonds?
What were the distributional implications?
•
creditors vs. Greece; but also inter-creditor distribution
3.
How was the collective action problem addressed?
4.
Was Greece’s December 2012 buyback a “boondoggle”?
5.
Assessment and implications
•
Was the restructuring necessary?
•
Could it have been handled better?
•
Could it serve as a template for future restructurings?
Was the restructuring necessary? – Yes
The argument against: decision to restructure in principle (July
2011) contributed to spread of Eurozone crisis to Italy and Spain.
However, deep restructuring still was the right decision.
1. Greek debt unsustainable -- clear to IMF staff since beginning
of programme; official position of IMF as of October 2011.
2. Only alternative to deep debt restructurings would have
been a large official transfer (not just a loan), in excess of
€100 billion.
3. Eurozone had instruments to undertake the restructuring
while limiting the contagion (although it was initially
reluctant to use them)
4. In the end restructuring was smooth and EZ did not fall apart.
Could restructuring have been handled better? - Yes.
1.
Left money on the table for tax payers (Greek and European):
• One size fits all approach (PV cost: €21 billion)
• Bank creditors went scot free (PV cost: €22 billion)
• Equal treatment of foreign and domestic law bondholders
• Came too late (by at least 6 months; cost >€10 billion);
• Exclusion of ECB (initially even ECB profits)
Result: Will require additional debt relief (in one go, or drip-drip-drip)
2.
Exceptionally large cash component, financed by EFSF
• implies that almost all residual risk is now borne by the
European taxpayer.
3.
Soft approach vis-a-vis holdouts: large cash sweetener ex ante;
repaid in full ex post.
Does Greece provide a template for other
countries wanting to restructure? – Not really.
Many European countries have large outstanding local law debt
stocks – hence could use retrofit CAC, seniority upgrades as a
substitute for confrontation. But: no template.
1. Concentration of sovereign debt in the hands of domestic
banks limits maximum debt relief.
2. Less domestic law debt in several countries (Cyprus)
3. Foreign law bonds will be much harder to restructure:
•
Large-scale officially financed cash offers unlikely to be
repeated (and not desirable).
•
Holdouts emboldened by successes in Greece, recent
court cases (NML vs Argentina, Assenagon).
How an (unlikely) new sovereign restructuring
would need to look like in Europe
1. As in Greece, use domestic law to restructure domestic law
bond holders.
2. Would likely need to include some classes of bank liabilities in
restructuring (junior debt; possibly senior debt)
3. A much more coercive approach towards foreign bond
holders (drop the pretense of voluntariness)
 Note: does not necessarily imply a higher haircut vis a vis
foreign law bondholders – depends on required debt
relief; quantity of “bailin-able” bank debt.
Conclusion: a much riskier – financially and legally – operation
than in Greece. Could be done, but unlikely to happen.
Thank you
Backup slides
Debtor coerciveness: historical comparison
Date
Total
coerciveness
(max. 10)
PostDefault
Full
Moratorium?
Forced
Exchange
Explicit
Threats
Mexico (Brady deal)
4.2.90
3
Yes
No
No
Yes
Nigeria (Brady deal)
1.12.91
8
Yes
No
Yes
Yes
Brazil (Brady deal)
15.4.94
7
Yes
Yes
No
Yes
Bulgaria (Brady deal)
29.6.94
6
Yes
Yes
No
Yes
27.10.94
5
Yes
Yes
No
No
1.3.97
9
Yes
Yes
No
Yes
13.12.99
3
No
No
No
Yes
7.4.00
2
No
No
No
Yes
Ecuador
23.8.00
6
Yes
No
Yes
No
Russia (PRINs & IANs)
25.8.00
6
Yes
Yes
No
No
Uruguay
29.5.03
1
No
No
No
No
1.4.05
9
Yes
Yes
Yes
Yes
Belize
20.2.07
2
Yes
No
No
No
Greece
9.3.12
2
No
No
No
Yes
Poland (Brady deal)
Peru (Brady deal)
Pakistan (Bond debt)
Ukraine (Global Exch.)
Argentina (Ext. debt)
Source for all countries except Greece: Enderlein, Trebesch and von Daniels, 2012.
Yield curve after the exchange (all new bonds
long)
Exit yields of new bonds on first day of trading
20
Yield
15
10
5
0
0
2
4
6
8
10
12
14
duration (years)
16
18
20
22
24
Can attempt to “impute” complete yield curve
Peak default density: 0.5 years; SD 3 months
Peak default density: 2 years; SD 6 months
Peak default density: 0.5 years; SD 6 months
Peak default density: 2 years; SD 12 months
Volatility of yields after issuance
Yields of shortest dated and longest new bonds,
March-June 2012
35
25
20
15
10
2023 bond yield
5
2042 bond yield
25/6/12
18/6/12
11/6/12
4/6/12
28/5/12
21/5/12
14/5/12
7/5/12
30/4/12
23/4/12
16/4/12
9/4/12
2/4/12
26/3/12
19/3/12
0
12/3/12
Yield of new bonds
30
Computing PSI-induced creditor losses
•
Compare present value (PV) of new bonds with PV of old
bonds, both evaluated at same, post-exchange market yield.
 Differs from market practitioners who compare PV of new
bonds to outstanding face value of old bonds
•
Concept measures the loss incurred by a participating creditor
if the counterfactual is keeping the old bond and being repaid
with the same risk as participating creditors
 In contrast, counterfactual in practitioner concept is full
and immediate repayment – no such right in Greece
•
Hence our concept measures the temptation to free ride at
the time of exchange, conditional on repayment risk as it
emerges after the exchange.
Computing debt relief
Creditor losses and debtor gains (debt relief) may not be the same
for three reasons:
1. Exit yield may not be appropriate discount rate: if debtor
intends to repay, and expects to borrow again in the future,
should use expected borrowing rate in normal times
•
Not appropriate if assume debtor is chronically credit constraint –
need to use higher discount rate (Dias et al, 2012).
2. From Greece’s perspective, the value of borrowed PSI
sweetener should be lower than it’s face value (€29.7 bn)
3. Greece borrowed €22 bn from EFSF to compensate its banks
for PSI-related losses