January 28, 2012
The Greek debt negotiations are getting into a very interesting phase indeed. Interesting as in, if you’re not scared about what might happen then you’ve not been paying attention.
OK, so we all know that Greece has to cut its debt burden. There’s going to be a haircut for some groups that hold the bonds. The information for public consumption is that it will only be the private sector holders who have to take the loss. The inside word is that this isn’t enough, some of the public sector holders are going to need to take one too otherwise Greek total debt won’t fall enough to be sustainable.
However, there are two new points which make the resolution of all of this much more difficult: exciting if you like. The first is this absolutely astonishing demand the FT says is being made of Greece:
1. Absolute priority to debt service. Greece has to legally commit itself to giving absolute priority to future debt service. This commitment has to be legally enshrined by the Greek Parliament. State revenues are to be used first and foremost for debt service, only any remaining revenue may be used to finance primary expenditure. This will reassure public and private creditors that the Hellenic Republic will honour its comittments after PSI and will positively influence market access.That is absolutely astonishing. These are harsher terms than the British Empire ever imposed, even backed up by gunboats and the Royal Navy. Imposed on anyone at all that is, not just whatever tussles were had with Greece.
De facto elimination of the possibility of a default would make the threat of a non-disbursement of a GRC II tranche much more credible. If a future tranche is not disbursed, Greece can not threaten its lenders with a default, but will instead have to accept further cuts in primary expenditures as the only possible consequence of any non-disbursement.
An “all good efforts” committment to debt repayment is usual enough but an absolute one simply unheard of. It does, quite literally, say that if there’s an outbreak of plague that sweeps through the country (or any other disaster you might like to think of) then Greece has to repay the debts before offering health care to its own citizens at a time of national disaster.