Next Time, Greece May Need New Tactics

Excerpt from an article in

The New York Times

Saturday, March 10, 2012

Next Time, Greece May Need New Tactics

By LANDON THOMAS Jr.

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’s 260.2 billion euros ($341 billion) 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 percent 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 percent of the bondholders; the number was expected to rise to 95 percent after Athens invoked a so-called 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 euros, or about $132 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.