Euro Debt Crisis: Extend and Pretend Phase Begins

Greek Bailout Debt Swap Mooted

by Pater Tenebrarum

How can one continue to pretend that the government of a country that has been in technical default for 90 of the past 180 years and remains clearly bankrupt even after two major bailouts and two 'debt haircuts' in a row will somehow 'make it' and actually repay its debts one day?

The answer is: extend and pretend. As reported by Reuters, Greece, the EU's major leading indicator in terms of bailout policy, is proposing just that solution: 

“Greece is looking into swapping a big chunk of its bailout loans with a 50-year government bond as a way to achieve debt relief once it attains a primary budget surplus this year, an official close to the discussions told Reuters on Saturday.

Twice bailed out with 240 billion euros by its euro zone partners and the International Monetary Fund, Greece aims at a primary budget surplus this year, excluding interest payments, which will allow it to seek debt relief from its lenders.

International lenders have already agreed they could give Athens further debt relief, likely in the form of lower financing costs or extended repayment of its loans, if it meets its fiscal targets this year. "Among the proposals being examined at a technical level as part of debt relief measures is issuing a long-term bond with a maturity of up to 50 years to possibly replace the bilateral loans from the first bailout," said the official who declined to be named. The official did not disclose the size of the bond issue under discussion.

Euro zone countries provided Greece with 52.9 billion euros of loans in the first 110 billion-euro bailout, which included 20 billion euros of loans from the IMF. The remainder of the aid came from the EFSF rescue fund. Repayment of these bilateral loans is set to begin in 2025. The swap would extend repayment by decades.” 

(emphasis added)

Extend repayment by decades! One might as well say: dear euro area tax cows, wave good-bye to your money. In five decades the currency will lose so much of its purchasing power that we could just as well call a spade a spade and accept that Greece is bankrupt.

Token Resistance

As always in these cases, the official lenders are putting up a show of token resistance to Greece's proposal and are denying that discussions are even taking place. These denials should be read as a confirmation: the extend and pretend scheme is precisely what is about to happen. 

Athens has about 30 billion euros of outstanding government bonds held by investors. The big chunk of its debt load, expected to peak at 322 billion euros or 175.6 percent of gross domestic product this year, is official sector loans owed to its partners and the IMF.

The official said there were no discussions taking place between the Greek government and its international creditors on the idea of swapping official sector debt with a long-term bond.

"For this to happen, Greece must achieve a sustainable primary budget surplus to activate the agreement on further debt relief," the official said.

Greece and its lenders are close to agreeing that Athens will achieve a small primary budget surplus this year, a senior finance ministry official told reporters last month.” 

(emphasis added)

Why the denials when Greece already fulfills the sole condition that has been stipulated? Expect more such extend & pretend schemes to be enacted in the remaining peripheral crisis countries such as Portugal, Ireland and perhaps even Spain (in the context of the bank bailout). No wonder the credit markets have recently been so relaxed. CDS spreads on the 'PIGS' (see below) remain quite high, but are a far cry from previous highs.