Bond exchange does not turn Greek debt sweeter for bondholders

Mike Turner, head of Global Strategy and Asset Allocation at Aberdeen Asset Management, is dismissive of last week’s PSI deal on Greek debt.

The self-congratulatory tone of politicians and policymakers following Friday’s successful restructuring of Greek debt could lead one to think this was the finale to the country’s woes. Indeed, French president Nicholas Sarkozy, who is facing elections later this year, said “Today the problem is solved.”

Unfortunately the restructuring merely signalled the end of the first act. Yes, the €206 billion bond exchange – the largest in history – is a step forward with investors agreeing to take a significant haircut. The International Swaps and Derivatives Association (ISDA) belatedly announced that this was a credit event meaning holders of Credit Default Swaps (insurance against this happening) would be paid some US$3.2 billion. However, the restructuring is only likely to be the first of many.

The deal has wiped some €105 billion off Greece’s €350 billion debt mountain and secured a next round of financial support. Eurozone finance ministers have already agreed to lend €35 billion upon completion of the exchange and may make a further €95 billion available.

But the aim of reducing the country debt-to-GDP ratio from 160% to 120% by 2020 still looks an impossible task without further write-offs; Greece’s economy contracted by 7.5% in the last quarter of 2011. This comes at a time when the government is pushing through further austerity measures, including spending cuts equal of 1.5% of output, meaning more  job losses. The country may well be in the midst of one of the longest recessions in modern history.

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