Greek Loans May Cost Less Than Restructuring, CreditSights Says

Tackling the Greek crisis may be better left until 2013 because forcing losses on bondholders this year may cost more than extending new loans, according to analysts at CreditSights Inc.

Greece forecasts its budget deficit between now and 2013 will be 42 billion euros ($60 billion), a gap creditors aren’t likely to fund if they’ve just taken losses in a restructuring, according to a report by analysts led by David Watts in London. There’s also the risk that a restructuring may create contagion for Spain and “potentially even Italy,” they wrote.

“There are reasons to prefer tackling the problem in 2013 rather than earlier,” Watts said in an interview. “There’s a risk that if Greek private-sector creditors are forced to accept losses in 2011, the cost to European taxpayers between now and then could be greater than the cost of expanding the Greek lending facility.”

Inspectors from the European Union and the International Monetary Fund are wrapping up a review of Greece’s progress before deciding on further aid, including the release of 25.5 billion euros. The country has 26 billion euros of debt maturing this year, of which 11 billion euros is in bills that it will need to roll over to fund its budget deficit, CreditSights said.

“A liquidity crisis can happen really, really quickly, especially if the bill market gets scared,” Watts said. “I can’t see how it wouldn’t if Greece doesn’t get the additional funding.”

Spanish Sustainability

The EU is also unlikely to accept the restructuring of Greek debt because if losses are inflicted on bondholders, those who doubt the sustainability of Spanish debt “may conclude that avoiding Spanish bond auctions is the only sensible course of action,” the analysts wrote.

While Spain’s ratio of debt to economic output is forecast to be 67 percent this year, its budget deficit is the result of an unemployment rate in excess of 20 percent.

“Investors don’t know for certain that Spain’s situation is sustainable,” the analysts wrote. “If Spain does prove to be unsustainable and the EU has demonstrated a track record of inflicting losses on creditors, then it would be understandable if investors hesitate about buying any new debt.”

If the EU acts this year, it is likely to seek a voluntary “re-profiling” of bank-held debt, according to New York-based CreditSights. Greece may also introduce a so-called collective action clause into its debt, allowing a set majority of bondholders to agree a restructuring that’s binding on all holders. That might lay the foundation for buybacks using EU funds by signaling a restructuring is coming, pushing down bond prices, according to CreditSights.

An eventual restructuring is likely to involve a range of options, allowing banks to duck losses and encouraging bondholders to take part. Non-bank investors may be offered zero-coupon bonds backed by the European Financial Stability Facility, to reduce Greece’s funding costs and extend its maturities, according to CreditSights.

Exchanging into 15-year zero-coupon bonds with the top ratings with a current price of 60 euros and a payoff of 100 at maturity would give holders a yield of close to 3.5 percent, similar to 15-year swap rates, the analysts wrote.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE