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Greece and its private creditors on Friday were nearing an agreement on a deal to write down 50%-70% of the face value of the country’s debt by swapping existing bonds for new bonds with longer maturities and lower interest rates. Last weeks talks broke down, so we have yet to see the details on paper. What rate is chosen could determine how much of a loss creditors will take on the current value of their Greek debt holdings. Participants in the talks say discussions are continuing and the exact details could change. Technically, this is considered a restructured debt reorganization dubbed during the process of bankruptcy. Portugal clinched a deal on ambitious labour market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear. Portugal is the next potential candidate to default in the euro zone after Greece — a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks.

A deal between Greece and private-sector creditors has been identified as a prerequisite for progress by the European Union and the International Monetary Fund to make their contributions to a second bailout package for Greece totaling €130 billion ($168.6billion). Greece and representatives of bondholders, predominantly banks and hedge funds, were closing in a coupon that would begin at 3.5% on new bonds with shorter maturities and rising to a cap of 4.6% on longer-dated bonds. The new bonds will carry maturities of up to 30 years, with a grace period on repayment of principal debt of up to 10 years under discussion.

Creditors would be writing down 50% of the face value of the bonds, but in terms of net present value over the course of the maturities represents a loss for bondholders of between 65% to 70%, said a participant in the talks. The goal is to slice €100 billion off Greece’s total €360 billion stock of debt—saving Greece some €4 billion a year in interest payments. The amount of public support for Greece will depend on how much of a reduction the private sector makes in the country’s overall debt.

There is pressure on the government to make up for missed deficit targets last year, as well as to detail some €12.5 billion in further fiscal cuts to narrow Greece’s budget deficit over the next four years which will further bring deep recessions.

Portugal

Portugal clinched a deal on ambitious labour market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear. Portugal is the next potential candidate to default in the euro zone after Greece — a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks. 

The concerns were clearly borne out this week as Portugal’s bond yields rose virtually without interruption, to all-time highs, despite the issuance of 2.5 billion euros of short-term treasury bills on Wednesday at slightly lower yields. The country’s 10-year yields rose to almost 15 percent on Thursday and hovered around 14.80 percent on Friday. Five-year credit default swap prices implied the market was pricing in a 66.8 percent chance of a Portuguese default. The sharp rise in bond yields was partially triggered by Standard & Poor’s downgrades of European countries last week, which left Portugal as the second euro zone country to be rated “junk” by all the main rating agencies, along with Greece.

Portugal was the only country really rattled by the downgrade because it is seen as a much more complicated case. It combines the same high level of private sector overindebtedness as Spain, high public sector debt similar to Italy, plus the economic recession. 

The key problem for Portugal, which was the third euro zone country to seek a bailout after Greece and Ireland, is whether it has enough time to restructure its economy to grow as it enacts harsh austerity and faces the worst recession in decades. This year will be the toughest of the three-year bailout as deep spending cuts, including the elimination of two months of pay for civil servants and across-the-board tax hikes, spark a 3 percent economic contraction after a 1.6 percent slump in 2011. The most probable outcome is Portugal asking for longer terms or more bailout money, just as Greece has done. Portugal has to return to the long-term bond market in the second half of 2013, which many analysts see as at least hard to achieve. Problem relates to its high level of debt, currently around 100 percent of gross domestic product, combined with low growth.

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This entry was posted on Friday, January 20th, 2012 at 11:54 am and is filed under Contributors, Debt, Economics, Facebook feed. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.