The efforts of Europe, Greece and the International Monetary Fund to put the debt crisis that began in the Mediterranean country in order do not seem to be succeeding. The new long-term Greek government bonds, which were circulated after the haircut of the debt held by private investors (PSI) collapsed in the capital markets.
11-year Greek government bonds that were issued on 12 March this year are quoted at a fifth of their nominal value or 22% of their initial price. Although the Greek debt haircut was set at 53.3% of the nominal value, the market devaluation of Greek government bonds reached 75%. The spread index of 10-year Greek government bonds rose again after a short decline, reached around 400 basis points in less than a month and exceeded 2000 basis points.
Financial analysts doubt the success of Greece to restore economic stability by 2015, when the second financial aid will expire. Furthermore, they do not think this debt reduction is sufficient to restore the Greek credit balance to sustainable levels. Investors expect that the country will need at least a new cash injection after the second bailout or another debt reduction.
These concerns are confirmed by the recent report by the International Monetary Fund. It shows that Greece will end up with a black hole of 32-67 billion euro in state finances in less than five years, which is not yet clear how can be filled. Then, a new reduction in external obligations will be more difficult because institutional investors and the euro area will hold the main Greek bond package.
The losses of individual holders of Greek government bonds after the PSI are estimated to 75%. Their union met with the Chairman of the Government Debt Management Agency Petros Christodoulou to ask for their compensation promised last year but did not find a response. The first claims of investors who will seek their rights against the Greek state and the reduction of the nominal value of Greek bonds in court are not late in coming either.
Bonds held by state enterprises, which were used by banks as guarantees for loans, continue to create serious problems. They amount to 8.3 billion euro and companies’ managements still refuse to include them in the PSI process. Therefore, the Ministry of Finance has allowed a third delay of the final period for involvement in the "voluntary" debt reduction. On 11 April this year, bonds worth 20.3 billion euro will be exchanged under foreign law. The rest of these bonds will be exchanged on 20 and 25 April.
The total nominal value of bonds on the exchange list of the Ministry of Finance is 205.6 billion euro. So far, 197.3 billion euro of this package has been subjected to exchange. To complete the PSI programme, bonds under foreign law and those that guarantee loans to state enterprises should be involved. Most of these bonds are held by hedge funds, which have acquired them at prices much lower than the originally traded prices. They have purchased the securities at 35-40% lower value than their nominal value and now, they insist that the bonds should be paid at their full nominal value. The response of the government is that the "economic programme does not provide for nor does it have available funds for payments to private creditors, who refuse to participate in the PSI". If Greece meets this threat, the International Swaps and Derivatives Association (ISDA) announced that it would have no other choice but to declare a credit event. The outcome of the competition will become clear by 15 May this year. Then is the maturity of a bond worth 450 million euro held by a hedge fund that requires the payment of its full amount.
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