Greece Debt Works For Now, But Will Investors Return?

By Andy Dabilis

While Greek and Eurozone officials rejoiced over a deal that lets the country reduce its debt by 100 billion euros by forcing losses of 74% on investors — who may not get paid back in full until 2041 — some analysts fear it may keep the country reliant on more rescue loans when the bailouts run out in a few years.

Getting enough voluntary support for the so-called Private Sector Involvement (PSI) programme was a demand of the EU-IMF-ECB Troika as a condition of the second, 130-billion-euro rescue package. The first rescue loan, for 109 billion euros, came last year.

Both bailouts came with attached austerity measures that have created a deep recession, 21% unemployment and caused the economy to shrink 6.9% in 2011. Greece’s debt still is expected to be 150 to161% of GDP this year.

Finance Minister Evangelos Venizelos, who is stepping down to take over the leadership of the PASOK Socialist party and be its candidate for prime minister in elections later this spring, hailed the deal he helped negotiate. But in order to make the deal work, he had to activate Collective Action Clauses (CAC’s) forcing investors who refused to take losses to do so anyway — including small bondholders and his country’s own pension funds — to insure enough participation, which came in at 95.7%.

Venizelos extended the offer to the holdouts until March 23rd to take or leave the deal, which imposes an instant 53.5% haircut, but rises over the time it takes for Greece to repay the investors.

“We owed it to our children and grandchildren to rid them of this debt,” he said.

But Athens think tank ELIAMEP Research Fellow George Tzogopoulos told SETimes: “I’m very skeptical because no one trusts Greece anymore. After the haircut, the deficit will be even worse because foreign investors won’t want to come here anymore.”

He said supporters “can celebrate. But if you look toward the future it is catastrophic … we can get loans from the EU, but foreign investors won’t be willing to invest.”

There is already talk of a third bailout. In a recent report, the Troika said the biggest risk caused in part by the PSI is that Greece won’t be able to fund itself in the markets when the bailouts end in 2015.

And, it noted — despite pay cuts, tax hikes, slashed pensions, the expected firing of 150,000 public workers, eliminating collective bargaining and minimum wage cuts — Greece must reduce spending another 12 billion euros the next two years.

“We see this hesitation of the markets reflecting the prices of the new bonds [that were issued after the PSI]. The question remains about the liability of the Greek deficit,” Haralambos Tsardanidis, director of the Institute of International Economic Relations in Athens, told SETimes.

Dora Bakoyianni, who started the Democratic Alliance Party after being ousted from New Democracy for refusing to support its change-of-heart to go along with austerity as part of the second bailout-PSI, said small investors –11,000 holding up to 100,000 euros — had been burned.

“We cannot betray the people who put their trust in us and purchased Greek bonds,” she said. Their holdings of about 2.3 billion euros are less than 1% of the 206 billion euros involved in the PSI, and Venizelos earlier said they would be protected.

The deal shifts much of the debt from private investors to public entities, including the ECB, would should provide further incentives to keep Greece in the Eurozone, but doesn’t reduce the debt as much as it seems, said George Stathakis, an economics professor at the University of Crete.

“The PSI had no real effect on the public debt of Greece because we reduced the debt by 100 billion euros. But at the same time, we got a new loan of 130 billion euros and this has left the total debt practically untouched at 330 billion euros,” he told SETimes.

“Before the PSI, the debt was primarily privately owned. Now it is owned by the European Financial Stability Facility and the ECB,” he said. “The problem is the extreme recession the economy is undergoing. It’s unprecedented by western standards.”

So is the PSI deal, but Venizelos insisted it saved Greece and eventually would create a more stable economy, which could be an incentive for investors.

“It’s the best we could do,” Dimitri Sotiropoulos, an associate professor of political science at the University of Athens and a Senior Research Fellow at ELIAMEP, told SETimes.

About 30 billion euros will be used to buy bonds for investors who agreed to the PSI, and nearly 50 billion euros will go toward recapitalising Greek banks, which is critical, said Sotiropoulos.

“We need the Greek banks to start distributing loans to small and big businesses. Otherwise the recession will continue and unemployment will not ease,” he said.

And, said Tzogopoulos, “It was a relief, but it was not a solution for the Greek debt.”