Greek bailout sets stage for next crisis

London: The Greek government was able to legally strong-arm most of its private bondholders into accepting the debt reduction deal it completed Friday. But next time — and experts predict there will almost certainly be a next time — Greece might have much less leverage.

That's because as a result of Friday's deal, the bulk of Athens' €260.2 billion (Dh1.26 tr illion) in remaining government debt will now be held by the International Monetary Fund, the European Central Bank and the individual European nations that have lent Greece money and contributed to the region's bailout fund.

Politically, Greece would be hard-pressed to force debt losses on such a formidable international group, the way it did with the private banks and hedge funds that have just been forced to accept a 75 per cent loss on their Greek bond holdings.

Greece's main creditors, in effect, are now foreign taxpayers — who are likely to be much less malleable than the private creditors if Greece needs to renegotiate its staggering debt load a year or two down the road.

"From now on, whatever happens in Greece, it will be a matter between Greece and the taxpayers of the rest of the euro area," said Jacob F. Kirkegaard, an analyst at the Peterson Institute for International Economics in Washington.

The final private creditor deal announced Friday was agreed to by nearly 86 per cent of the bondholders; the number was expected to rise to 95 per cent after Athens invoked a collective action clause forcing others to join in. Without such a deal, Greece had strongly implied, it might default altogether, with no one getting paid. The outcome has enabled Greece to reduce its debt load by just over €100 billion or about $132 billion (Dh484 billion.)

Later in the day, the International Swaps and Derivatives Association ruled that the agreement was nonetheless a technical default by Greece — a ruling that will mean payouts on some insurance contracts, known as credit-default swaps, that various investors had taken out on the privately held Greek debt. Around $70 billion in default swaps on that debt are outstanding, although analysts expect the net payout to end up at only $3.2 billion or so.

As recently as 2008, virtually all of Greece's government, or sovereign, debt was held by private sector bondholders, chiefly banks and investment funds. But as a result of Greece's escalating debt crisis and intervention by public institutions, private creditors now hold only 27 per cent of Greece's debt.

Financial ward

Greece, in essence, has become a financial ward of Europe. And, because the IMF will probably be reluctant to put in new bailout money in the coming years, the burden will increasingly fall to Europe, led by Germany, to finance Greece. That will very likely happen directly, through country-to-country loans, and indirectly, through the Eurozone's rescue fund — the European Financial Stability Facility, to which most members of the euro currency union contribute.

As a rule, the IMF does not accept haircuts and insists that its loans are always senior to all other obligations. European politicians, meantime, already under heavy criticism from voters for their countries' increasing financial exposure to Greece, would have a difficult time explaining why they must take write-offs on some of their Greek debt because Athens still cannot balance its books.

And many analysts do expect that Greece will eventually need to ask its public sector creditors to renegotiate its debt.

"It will happen," said Stephane Deo, an economist at UBS in London, referring to the next Greek crisis.

Deo expects Greece to make such a request in 2013, when he said the country would be able to show a primary surplus — meaning that its budget would be in balance if it did not have to pay interest on its debt. Greece, at that point, would in a better position to argue that it should reduce its interest payments and use its money for domestic purposes instead.

‘Pricing in'

"The market is already pricing in" a second round of restructuring, Deo said, noting that the new Greek bonds issued in the deal completed Friday were already trading at a discount to their face value. That, he said, reflects the view of many investors that there will be other haircuts to come.

Friday's deal, the largest debt write-down in history, will provide immediate relief to Greece by cutting back on €15 billion, or $19.8 billion, in interest and principal it was paying each year to its private bondholders. And with the proposed establishment in Greece of a system in which tax revenue must be used first to pay off debt obligations before being spent domestically, it will no longer be easy for Greek politicians to run budget deficits for political purposes.

"We do not have the right to waste the money that we will save in interest and debt repayments," the Greek prime minister, Lucas Papademos, said in a televised address to his nation Friday night. "We have a great new opportunity. Let's not waste it."

But even after the new relief, Greece is still expected to be saddled with a ratio of debt to gross domestic product of 151 per cent in 2012, and 149 per cent in 2013. These debt levels remain the highest in Europe.

The Greek economy remains in a wretched state — it shrank 7.5 per cent in the fourth quarter. And youth unemployment, at 51 per cent, is now officially the highest in Europe. So it is by no means clear that Athens will be able to generate the cash to service its remaining debt.

Analysts differ on the size of the financing gap that Greece will face in the next two years — the sum of money that it will need to fulfil its internal and external obligations. J.P. Morgan, in a research note Friday, put the figure at €20 billion, and others have said the amount might be twice that.

On Friday, Fitch became the third credit ratings agency to downgrade Greece, giving it a rating of "restricted default." Fitch said it would upgrade Greece after a successful completion of the debt exchange, expected at the end of the month.

As previously agreed, Eurozone leaders are now expected to sign off on the €130 billion in stopgap financing that Greece needs for this year. And on Thursday, the IMF is expected to approve its part of the Greek package.