EU eyes 50-60 percent Greek haircut for sustainable: Troika


By Jan Strupczewski

The confidential report, discussed by euro zone finance ministers on Friday, will form the basis for talks with private investors on what losses they should accept on their Greek portfolios in the second emergency financing plan for Greece.

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Private investors have already offered to accept a net present value loss on their Greek portfolios of 21 percent under a deal struck with euro zone leaders in July.

But since then Greece turned out to be in a deeper-than-expected recession, it is behind on its structural reforms, privatization and fiscal goals and market conditions have deteriorated.

Euro zone leaders therefore want to reopen the talks on how much private investors should contribute to keep Greece financed on top of cash from euro zone taxpayers. They are to make a decision on the private sector involvement (PSI) at a summit next Wednesday.

"Deeper PSI, which is now being contemplated, also has a vital role in establishing the sustainability of Greece's debt, said the report by experts from the European Commission, the International Monetary Fund and the European Central Bank.

The report analyses scenarios using discount bonds, with an assumed yield of 6 percent and no collateral, to assess the potential magnitude of improvements in the debt trajectory and potential implications for official financing.

"Debt can be brought to just above 120 percent of GDP by end-2020 if 50 percent discounts are applied," it said.

"Given still-delayed market access, large scale additional official financing requirements would remain, estimated at some 114 billion euros (under the market access assumptions used)," the report said.

"To get the debt down further would require a larger private sector contribution (for instance, to reduce debt below 110 percent of GDP by 2020 would require a face value reduction of at least 60 percent and/or more concessional official sector financing terms)," it added.

"Additional official financing requirements could be reduced to an estimated 109 billion euros in this instance," it said.

The report said that if the 21 percent net present value loss were to be maintained under the changed conditions, the cumulative additional financing needs from the euro zone, beyond what remains undisbursed in the present program, and including the eventual rollover of existing official loans, could amount to some 252 billion euros through to 2020.

This would still only lower the Greek debt to GDP ration to 152 pct in 2020 from an expected peak of 186 pct/GDP in 2013.

The report said that compared to July it now assumed a slower economic recovery, because experience showed that Greece was slow to implement structural reforms and therefore it would take longer for the country to reap their benefits.


The report assumed the Greek economy would shrink 5.5 percent in 2011 and 3 percent in 2012, only returning to average growth of about 1.25 percent a year in 2013-14, 2.7 percent in 2015-20 as a cyclical rebound kicks in, and structural reforms start to pay off, and 1.7 percent per year in 2021-30 as the economy reverts to potential growth, which is constrained by demographic trends.

"All told, real output growth is projected to be cumulatively 7.25 percent lower through 2020, versus the projections made at the time of the fourth review," the report said.

Greece is also expected to have lower than previously expected inflows from selling state-owned assets.

Until 2020, total privatization proceeds would amount to 46 billion euros, instead of the 66 billion euros assumed in the program -- the original target of 50 billion euros plus money reflecting the fact that bank recapitalization will likely create additional assets to be sold.

The Greek primary surplus is assumed to improve to 4.5 percent of GDP for the period 2014-16, ease to 4.25 pct in 2017-20 and to 4 percent in 2021-25.

The report assumes also that the Greek government would only be able to return to market financing once Greece has achieved 3 years of growth, three years of primary surpluses above the debt stabilizing level, and once debt drops below 150 percent of GDP.

The report said that total additional Greek banking sector support was estimated at 20 billion euros, bringing total HFSF (Hellenic Financial Stability Fund) needs to some 30 billion euros.

"The additional financing is needed to provision for losses on banks' private loan portfolios and on their government bond holdings," the report said.

The report forecast the euro zone's EFSF bailout fund, which would provide loans to Greece, would provide financing at 100 bps above the German 10-year Bund rate, rising from 4 percent in 2012 to 4.7 percent by 2016.

The report forecast that private sector participation in the new scheme would fall short of the 90 percent assumed in the July 21 deal, and that almost all of the debt would be exchanged for par bonds, involving about 35 billion euros in collateral financed by the EFSF.

A further assumption was that some 33 billion euros of post-2020 bonds would be bought back using 20 billion euros in financing provided by the EFSF.

The analysis also assumes IMF exposure under Stand-By Arrangement terms of 30 billion euros.

Greece is assumed to return to the market at spreads falling from 500 bps to 250 bps by 2020.

($1 = 0.720 Euros)

(Reporting by Jan Strupczewski; editing by Rex Merrifield)

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