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Source: Bianco Research, L.L.C.
Private investors holding Greek debt could be asked to accept a haircut of around 60% because a previously agreed 50% write-down is no longer seen as sufficient because of the deteriorating Greek economy, people with direct knowledge of the matter said Monday. A senior euro-zone official with direct knowledge of the talks said the country’s sovereign creditors including the International Monetary Fund, the 50% cut in the bond’s nominal value will not be enough and that a cut closer to 60% will be needed to bring Greece’s debt back to sustainable levels… “The cut in terms of net present value will likely edge higher towards 60%, or even higher. We still expect an agreement in January. There are reactions from bondholders but we basically have little choice,” a banker involved in the talks said. Officials say the discount rate used to calculate NPV losses is around 11% to 12%.
Greece faces the risk of a disorderly default in March if it doesn’t complete negotiations for the country’s second bailout starting this month, Prime Minister Lucas Papademos said Wednesday. In a copy of his comments made in meetings with employer and employee groups, Mr. Papademos said the coming weeks and months are “exceptionally crucial” for the country as Greece needs to secure funding from European peers and the International Monetary Fund. Among the financial pressures the heavily indebted government faces are €14.5 billion ($18.9 billion) of bonds expiring in March. “As a result of our actions and decisions in coming weeks, everything will be decided,” he said. His comments are in line with stark warnings from other government officials stressing the gravity of talks with representatives from the European Commission, International Monetary Fund and European Central Bank on Greece’s second bailout for €130 billion. Details of the deal, which comes after a first €110 billion bailout in May 2010, remain unsettled, particularly a provision calling on creditor banks to write down a significant portion of their Greek government bondholdings.
Comment: Talks of further “voluntary” haircuts should come as no surprise. As we have shown before, the market has priced Greek bonds much lower than the 50% “voluntary” haircuts. As of today, it would take an almost 80% haircut to be in line with market prices.