Greece: where are we now?

A man walks passed the Greek central bank Greece now owes most of its money to the ECB and European governments

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In theory, all the international support for Greece since May 2010 has been preparing for this day.

Without help, the Greek government would have messily defaulted long ago, with who knows what consequences for its neighbours and the entire global financial system.

The bailout bought time for the country to renege on its obligations in a more orderly fashion, when the world was also a safer place.

Is that what has happened today? Well, yes and no.

As I said on the Today programme this morning, as sovereign defaults go, this is about as orderly as they come. But partly thanks to all this support from its neighbours and the IMF, the Greek government will still come out of the process with too much debt.

There are some loose ends to clear up; not least, those pesky investors holding international law bonds, who've refused to play nice.

Damage contained

Yet, even the news that collective action clauses will be used to strong-arm some bondholders, for the first time in a developed economy, has barely caused a ripple in the financial markets.

Investors are disappointed, maybe. But not surprised. The ground had been carefully laid and the damage - so far, at least - has been contained.

All of which makes it sound like a roaring success for the "buying time" approach.

Except, they have gone to all this effort for a "default" which does not really do what Greece needed it to do.

Private investors may have lost nearly 75% of the present value of their holdings of Greek debt. But since the deal only involves the privately held debt, it reduces the total stock of Greek debt by less than 30%.

A similar "haircut' for private creditors, had it been attempted in 2010, would have given much greater relief. But back then, the Greek government's balance sheet was not heavy with the weight of the international community's generosity.

At the start of 2010, Greece had a debt stock of nearly 125% of GDP, but all of that was owed to the private sector. By the end of 2012 it will owe more than 80% of GDP to its friends in the EU and the IMF.

That's not including the debt held by the ECB which it bought on the secondary market, from private investors, which, in a complicated and controversial arrangement cooked up a few weeks ago, will not be part of the swap.

The upshot is that, even if everything goes according to plan - as it invariably has not over the past few years - all this haircutting of private creditors will still leave Greece with a public debt mountain worth more than 120% of its national income in 2015. Only this time, two-thirds of the debt will be owed to the official sector.

Those official loans have already been "restructured", in the sense that the interest rate has been cut and the maturity extended. But there is surely more to come.


In the meantime, there are good reasons for that 120% figure. Any lower, and investors would have looked to Italy and Portugal, and decided the mobile hairdressing salon was about to move on to them. Any higher, and the programme would lose all remaining macroeconomic plausibility.

But neither of those arguments can be much consolation for the Greeks, entering their 5th year of recession.

So, yes, there is plenty in this deal for the architects of this deal to be pleased about.

Even those who believe Greece (and maybe others) should have been allowed to default years ago will welcome the fact that collective action clauses are to be used for the first time in an advanced economy. Whether the authorities like it or not, this does set an important precedent.

Greek ministers will also be relieved that the convoluted "bailout' process they are involved in can stay on the road a bit longer, assuming Greece can now qualify for its next lump of official support.

However, if the past 2 years were all about buying time for this moment, it would be reasonable for ordinary Greeks to look at today's outcome and feel seriously short-changed.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 9.

    Greece should default and not seek further loans for the sake of her own people.

    Crediting nations such as ours will not like it, but the current situation of loans, default, more loans is farcical. Imagine what state the UK economy would have been in if we had kept twisting our finances to remain in the ERM 20 years ago?

    Greece should then exit the Euro and focus on her beleaguered citizens.

  • rate this

    Comment number 8.

    The amount of effort that has led to what is in reality a tiny reduction in the Greek debt will all have to happen again in the near future and then again and again. This solves nothing and has arguably roasted the chances of nearby EZ nations… What price new EZ credit now? Damned costly!

  • rate this

    Comment number 7.

    We now get to see what happens when the CDO's are triggered...

    Plus, we all know this isn't enough for Greece. And there's Portugal in the wings.

    The Euro survives a bit longer, no one trusts the ECB anymore and the Greeks are still suffering. Meanwhile the underlying problems remain.

    I give it 6 months. Mind you last time I did that, the next crisis appeared a few weeks later!

  • rate this

    Comment number 6.

    The purpose of the 3 years of can-kicking and the buying of Greek debt by the ECB from the markets was move that debt away from the balance sheets of the (mostly French and German) banks before any haircuts or defaults.

    This in effect nationalised the bank's losses on their bets that those Greek bonds yielding 5% were safe.

    This just motivates banks to keep on making reckless bets.

  • rate this

    Comment number 5.

    Mitch Feierstein in his "Planet Ponzi..." states for example:
    "Lies, lack of accountability - and a torrent of fake money... Central banks printing money... I don't think any voter ever voted for any of this."
    This is a new politicians-bankers Ponzi dictatorship. And we've voted it into office by our own media-controled ignorance. We'll only be able to get rid of it by re-educating ourselves.

  • rate this

    Comment number 4.

    "They would have defaulted" ? They have already defaulted. If welching on your debts is not defaulting, I do not know what is , and that is what they have done, how in future can any sane organisation lend money to any nation in the Eurozone knowing that the money may never be repaid ? Greece is just the first to renege on debt, several other Eurozone countries may well have to loin them.

  • rate this

    Comment number 3.

    Portugal needs to look at the Greek fiasco and go for broke, that is default would be quicker, cleaner and less painful!

  • rate this

    Comment number 2.

    Recession - you mean depression. There is more to come and the possibility of social unrest undoing the democracy developed since the colonels. The latter may well be swatting up on economics and finance for when martial law is declared.

  • rate this

    Comment number 1.

    When will it all end.....


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