4. The cuts in the Greek public debt
4.7 A bigger cut in the Greek debt via a restructuring in 2010?
To improve the debt sustainability of the Greek public debt (and to ensure that private creditors would have received an even lower share of the official assistance extended to Greece), it would have been necessary to engineer an even larger cut in the Greek Government debt. This begs the question of whether it would have been possible to obtain a larger debt cancellation if an operation had been carried out in 2010 instead of 2012. The two operations of 2012 (the forced exchange in March and the debt buy-back in December) enabled the cancellation of €127 billion of Greek Government bonds. After the second operation the amount of Greek Government bonds still on the market was equal to €37 billion, consisting mainly of long-term bonds (see Table 5).
An earlier restructuring could have avoided a higher burden on the Greek banking sector. Between 2010 and 2012 the composition of the bondholders changed in a non negligible way. In 2010 it was estimated that the share of Greek Government bonds held by non-residents could have been as high as 70 per cent147. However, by the beginning of 2012, this share was probably down to around 60 per cent, with almost one third of the total marketable Greek debt held by 'non-residents' having been bought by the ECB, which means that the share held by private non-resident creditors was around 40 per cent.148 In fact, non-residents had already started reducing their holding of Greek debt during the course of 2009.149 This is a well-known tactic, known in the jargon as "running for the exit", which often appears at the first sign of difficulties.150 The IMF gave several warnings, stating that delaying a debt intervention could significantly reduce its effectiveness.
146 The risk of the loans that the ECB extends to the commercial banks is also mutualised among its shareholders, but the
mechanism set up with the EFSF and ESM replicates much more closely the idea behind many of the Eurobonds proposals.
147 Financial Accounts of the Bank of Greece, "Liabilities of General Government". 148 Merler – Pisani 2012a.
149 The minutes of the IMF Board meeting that authorised the loan to Greece in 2010 (IMF 2010a) indicate that: "The Dutch, French
and German chairs conveyed to the Board the commitments of their commercial banks to support Greece and broadly maintain their exposure." (page 3).
This means that carrying out the restructuring of the debt in 2012 instead of 2010 has not only reduced the amount of Greek Government bonds that could be covered by the measure, but has also shifted the burden of the restructuring towards the resident bondholders and away from the 'non-resident'. This will have increased the impact of the measure on the domestic banking sector and on its recapitalisation needs, thus enabling a smaller overall reduction of the Greek public debt.
The expectation of a bigger reduction in the Greek public debt through a restructuring in 2010 is based on the assumption that it would have been possible to apply a percentage cut, similar to the one applied in 2012, to a larger amount of Greek Government bonds than were still on the market in March 2010, i.e. to more than the €205 billion covered by the forced exchange. If the cut were to have been conducted in May 2010, the total of bonds covered would have certainly been increased by the €58 billion reimbursed between May 2010 and the beginning of March 2012. To this might also have been added the bonds bought by the ECB under the SMP operations (which started in May 2010 and probably would not have included Greek Government bonds if a restructuring operation had been underway) and part of the bonds bought by some euro-area central banks (no information is publicly available concerning when the Eurosystem central banks bought the Greek Government bonds).
In any case, as previously mentioned, the gains obtained through the purchase of Greek Government bonds by the ECB and the euro-area central banks are being returned to the Greek authorities to the tune of €14.0 billion151. These gains result essentially from the difference
between the purchase price, usually well below parity, and the full reimbursement at bond maturity. The inclusion or exclusion of the bonds held by the ECB and the euro-area central banks does not therefore have a one to one effect on the total bond reduction.
The situation is more straightforward regarding the inclusion in a hypothetical restructuring conducted in May 2010 of the €58 billon of bonds that have been reimbursed between the beginning of the crisis and the beginning of March 2012. If the same percentage cut (53.5 per cent) were to have applied to these bonds this would then have allowed the cancellation of an additional €31 billion of Greek Government bonds.
It is, however, doubtful that it would have been possible to already implement the restructuring in May 2010 and, above all, that it would have been possible to apply the same percentage cut obtained in 2012. A restructuring operation in May 2010 would have meant that all policy makers would have been immediately convinced that the reasons to fear a Greek default were not very solid. But even if this were to have been achieved, it is unlikely that it would have been possible to obtain the percentage cut in 2010, which was made possible in 2012 by the change in the economic situation of Greece.
In May 2010 the perception of Greece's economic difficulties was very different from the one that prevailed in 2012 or that of today. Initially, some had even stated that the Greek difficulties were only due to a temporary liquidity crisis, which could have been solved with
the injection of just €40 or €50 billion152. At the outbreak of the crisis, many people really believed that Greece would be able to recover from its difficult situation within a few years. In July 2010, after the agreement on the first rescue package, Greece was able to raise €4 billion on the capital markets, with six and twelve-month bills at a very reasonable rate of interest153. The first reports on the implementation of the economic adjustment programme were rather positive. However, the situation deteriorated dramatically during the course of 2011 and, above all, in 2012 (also because of the political instability: the resignation of Prime Minister George Papandreou, the appearance of a possible 'Grexit' in the policy discussions, a new government under Lukas Papademos, two general elections and, finally, a national unity government bringing together three parties).
The first discussions on a possible debt restructuring were based on a potential cut of around 20 per cent. Later on, the discussions moved towards a 50 per cent cut increasing to 70 per cent towards the end of 2011. The forced exchange was finally based on a 68.5 per cent cut, minus a 'sweetener' equal to 15 per cent, resulting in an effective cut of 53.5 per cent. In a box containing the proposals to restructure the Greek public debt inserted into the Fourth Review of the programme published by the European Commission in July 2011, there is an assumption of a 40 per cent cut of the Greek public debt, but only to show that a restructuring would have had very negative consequences.154
If it had been agreed to restructure the Greek public debt during the course of 2010 it is very unlikely that it would have been possible to impose a 53.5 per cent cut, as happened in March 2012. To obtain the same public debt cancellation (€106 billion) the cut would have needed to be between 40 and 47 per cent, depending on the amount of bonds covered. The first figure assumes that all bonds would have been included; the second assumes the inclusion of only €58 billion of bonds, which were fully reimbursed between May 2010 and the beginning of March 2012. It is therefore possible that a restructuring of the Greek public debt in 2010 would have been conducted with a significantly lower percentage cut and would have resulted in a lower cancellation of Greek public debt, even if this cut would have applied to a higher volume of bonds.
One must also not forget the practical aspects. In order to impose the forced exchange it was necessary to obtain parliamentary approval for retrofitting new provisions into the Greek legislation regarding the issuing of public bonds. The negotiations with the bondholders also took months. With the level of knowledge and awareness of a default available to the European governments in 2010, no operation would have been possible until well into 2011. By way of comparison, the agreement on the restructuring of the Argentinean public debt was reached in 2005, almost four years after the default.
152 In 2010, notwithstanding the fact that many economists had argued that Greece was in an insolvency situation, it was wrong
but understandable to think that it was instead simply undergoing a liquidity shortage. It is perplexing, in the light of everything we have seen hitherto, that this idea still persists today. Yet the idea certainly is still alive and is sometimes expressed even by well-known political figures.
153 Hellenic Republic Public Debt Bulletin N° 59. 154 European Commission 2011b, page 7.
In any case, to obtain a larger cut in the Greek public debt, it would have been necessary to accept a resounding default in 2010. One possibility would have involved allowing the IMF to act alone. Given the limited resources available, this organisation would have had to engineer a draconian cut in the public debt, something that, I believe, would not have been politically possible. It would not have been accepted by the majority of the European public opinion; it would probably not have been accepted by the very people who today complain about too much money having gone to the banks.