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The big focus in recent weeks has been the private sector involvement in the latest Greek aid package, but it’s the part played by the public sector (governments and central banks) that is far more interesting but also concerning. At the time of the first bailout back in 2010, interest rates applicable to lending, whilst below market rates, were still designed to be being punitive. Now, with rates lowered again as part of this package (by 1.5% for 5 years and beyond), some contributors will actually make a loss on such loans.
The main omission in the statements released overnight is the extent and impact of the ECB’s involvement in the latest deal on Greece. Profits from the ECB’s holdings of Greek debt (as part of its bond-buying program) will be passed to national central banks, which “may be allocated by Member States to further improving the sustainability of Greece's public debt” according to last night’s statement. But this will be an uneven field, for those who are losing out on lending to Greece will be unlikely to disburse such profits to Greece as well.
Furthermore, national central banks have agreed to give up profits on their holdings of Greek paper in their investment portfolios, estimated to be EUR 12bln, which would eventually cut 1.8% from debt/GDP ratio by 2020. We don’t have the equivalent numbers for the ECB, but of course they will invariably be higher in terms of their impact, given holdings are around EUR 40bln (we’ll try to dig them out or infer them once more PSI details are available).
But it does create one more perverse aspect of about the Greek debt dynamics, that if there is an eventual default (still a distinct possibility), the loss of these revenue streams - gains from ECB and NCB holdings - would serve to increase the debt/GDP ratio because the underlying debt defaults and eliminates profits. Of course, this would be more than offset by the write-down taken by the public sector on their debt holdings. So, whilst public sector involvement is to be welcomed, once again it does create a situation in which any eventual restructuring would have to be greater than otherwise and the prior public sector contributions would become worthless.
