In an interview carried on Austrian Television station ORF, Euro Group President Jean-Claude Juncker admitted that the present bailout package for Greece will not stand (hat tip egghat). The 21% discount worked out just a few months ago will become 50 or 60% or more. Hence the need for bank recapitalisation. Even that may not be enough, Juncker said.
At present, the bond restructuring for Greece is predicated on a hypothetical discount of 21 percent, assuming the new bonds trade at a 9 percent Greek sovereign yield. Global Macro Monitor has shown that:
It is NOT – we repeat NOT — the amount that Greece will have its debt reduced. In fact, using the first term sheet of the Institute of International Finance, the actual debt reduction Greece would secure, on a present value basis, is only about 6 percent.
The deal is a soft restructuring, whereby the creditors agree to lower the interest rates as they extend the maturity and pretend they won’t have to write more debt down. The deal is not about principal reduction.
The deal everyone is talking about – and that Juncker is admitting is coming is a hard restructuring aka principal reduction. In April, S&P said we would see 50-70% haircuts. Otmar Issing was talking about 50% in September and Greek expulsion from the euro zone. Two weeks ago, I also used the 50% figure on Greek haircuts, saying that
Finally, finally, the politicians have relented and are moving to the inevitable solution for Greece, a haircut and recapitalisation plan.
Here’s what Juncker was saying:
When asked whether they were discussing a debt reduction of 50 to 60 percent in the case of Greece, Juncker said , “we’re talking about more.” He does not rule out a debt haircut, but one should not think that will be enough.
I don’t have video but it sounds to me like Juncker is hinting at a Greek exit from the euro zone. If I get video, I will post it.
This post originally appeared at Credit Writedowns and is reproduced with permission.