28 September 2011
(originally published 23 June 2011)
Daniel Gros is Director of CEPS. Thomas Mayer is Chief Economist of Deutsche Bank.
"In light of the continued difficulties experienced by the Greek government to implement the promises it gave to its creditors and convince its own population of the need for further rounds of tough reforms in combination with investors’ doubts that the country will ever be able to grow out of its public debt, this CEPS Commentary reiterates the authors’ earlier proposal to take advantage of the low prices of Greek debt to implement a market-based approach to debt reduction."
"...this approach has the advantage that it provides meaningful debt relief – over 50% as opposed to close to nothing under the PSI proposal of July 21st, agreed with the Institute of International Finance (IIF), an association of international financial institutions. Moreover, it would not necessarily lead to a rating of ‘(selective) default’ since a transaction between two private sector participants does not indicate a reduced willingness to pay. (The ratings agencies consider a buyback by the debtor as selective default.) By contrast, the PSI proposal, as currently planned, would certainly lead to a rating of selective default (at least for some time). Moreover, our debt buyback proposal would not trigger CDS contracts.
Moreover, the liquidity of Greek banks would actually be improved since they can now use Greek government bonds as collateral for ECB financing only at the market price (35-45%) and must accept a substantial haircut on top of this. After the exchange, they could use Greek government bonds in repo operations close to the full face value of the new nominal value of the EFSF bonds they have thus acquired. For regulatory purposes, the Greek banks would of course need to be recapitalised (since their present holdings are still booked at 100%), but this could be done by giving them new Greek government bonds, which should be valuable since they would be issued after the debt stock has effectively been cut in less than half..."
[Mrt: This paper was in drawer since June. Typical known case :o). When all panic, take it out and this unpopular solution will be looked closely.]