Most media today mention that the Greek debt will be written down by 50%. Considering the previous negotiations and the plans of July 21, last, between the banks, EU and Greece, this seems highly unlikely.
First of all, a bond exchange, where the nominal value of the bond is halved but the interest changes, does not lead to a write down of 50% of the Greek sovereign debt. Taking the plans of July 21 as a starting point; using the same interest rates, (counterfactually) assuming the entire debt is in private hands and following the over-optimistic assumption from the IIF (the bank lobby) that 90% of those bond holders will participate in the bond swap, we reach a lowering of the Greek debt of approximately 36%.
However, in the July 21 plans, Greece had to finance a loan in order to buy collateral for EUR 42 billion in zero-coupon bonds. It is unlikely the banks accepted the deal without any type of collateral.
The statement also mentions that “Euro area Member States will contribute to the PSI package up to EUR 30 billion”. I doubt that is a gift to Greece but the EU remains silent on the matter for now. If it is a loan; what’s the maturity date? What is the interest rate? Nobody knows. We do know that if it is a loan, Greek debt will increase.
The EUR 100 billion put up by the EU and IMF to finance a multiannual programme will most likely also be a loan to Greece. This alone amounts to more than whatever reduction the Greeks would get through the bond exchange, which means a de facto debt increase over time.
Just like the plans of July 21, we are not dealing with a debt reduction but a plan that aims at improving the ratio between debt and Gross Domestic Product (GDP). No wonder the “Main Results of EU Summit” opens under paragraph 1 with:
An agreement that should secure the decline of the Greek debt to GDP ratio with an objective of reaching 120% by 2020. - emphasis mine
After the bond exchange is done and the extra loans Greece will probably have to take out, Greek debt actually has increased. The real debt reduction will have to be financed with money from privatization, austerity measures and a Greek tax hike.
Meanwhile, all the calculations on which the banks and EU based themselves on July 21, last, assume a stable economy in Greece for the next 5 years and after that strong growth. There are no indications that these assumptions have changed. With a currently shrinking economy, it seems already too optimistic.
Taking the plans into account falling consumer demand, due to the planned tax hike, high unemployment and austerity measures, is a certainty. That means a lower GDP.
The EUR 100 billion multiannual programme might have positive economic effects but without definitive plans, not much can be said about this. It also remains to be seen that it outweighs the drop in economic activity due to the tax hike and other austerity measures as well as the likely increase in debt (from the EUR 30 and EUR 100 billion mentioned above).
Aside from whatever debt reduction Greece can finance itself through the austerity measures, privatization and tax hike, the current plans will most probably not lower the debt further than 10%. Taking the likely debt increase into account of EUR 130 billion, Greece will end up with an increase of its debt of at least 5% and probably somewhere around 10 to 15%.
Read the analysis of the original plans of July 21 here.
