Don't Praise the Greek Debt Deal

Whether today’s announcement that holders of Greek sovereign debt have agreed in principle to a 50% haircut on the face value of the instruments raises some critical questions.

On the surface, with the notion of first-loss guarantees of new debt taking shape, this addresses the problem of existing debt for the first time, but first is the question of whether such a deal will actually happen.

This deal would knock 100 billion euros off Greece’s debt. But there is a huge difference between agreeing to agree and coming to an actual accord with the bondholders No timetable has been given for such agreement, but the drafting of all aspects of this plan are going at an unbelievably fast pace that will be difficult for the “troika” side to sustain. If the Union can’t close, or can’t close in time, any bump in expectations is vaporous at best.

Second, what, other than billions in “credit enhancements” allowing existing Greek debt to be swapped for future partially guaranteed AAA bonds, were the banks and other holders also promised in exchange for agreeing to agree to a cut in face value?

Certainly, writing off half is better than writing off all of the Greek indebtedness, but it is difficult to believe that the bondholders would (about halfway) go away for just that deal. And, this rollover deal assumes that there are no holders interested in getting out of the Greece sovereign debt business, which under the circumstances is difficult to believe.

Greek debt is still going to be 120% of GDP even if this deal goes as advertised, and it is unclear that the Greek government will even be able to sell this deal’s likely fresh promises of further austerity measures, so the rejoicing may be a bit premature.