Wednesday 16 June 2010

Restructuring of Greek government debt begins

Perhaps unnoticed by the national or international media, the restructuring of the Greek government’s debt has officially begun. Despite all protestations to the contrary, the restructuring effort has started right here in Greece, with the draft debt payment schedule for suppliers in the medical sector.

What is a debt restructuring? It is a situation in which a debtor is unable to pays its creditors the full amount owed, according to the payment terms agreed. In this case, there are several options for restructuring:

a. A new payment schedule is agreed upon;

b. A “haircut” on the debt occurs, in which the debtor pays back only a certain percentage of his debts to his creditors;

c. An agreement is made to reduce interest charges;

d. Other forms of compensation are agreed.

According to today’s Kathimerini, the government owes EUR 7.1 bln to suppliers of pharmaceuticals, equipment and disposables/consumables. Some of this debt dates to 2005.

According to an agreement reached yesterday, the government has proposed the following payment system:

a. Debts of EUR 1.45 bln dating from 2005 and 2006 will be settled in cash;

b. Debts of EUR 1.1 bln dating to 2007 will be settled with an interest-free, 1-year government bond as well as a further cash payment of EUR 100 mln;

c. Debts of EUR 2.2 bln dating to 2008 will be settled with an interest-free, 2-year government bond;

d. Debts of EUR 2.05 bln dating to 2009 will be settled with an interest-free, 3-year government bond.

Of the total amount of EUR 7.1 bln owed, approximately EUR 6 bln will be repaid, given that the bonds carry a “discount” of about 15%. The bonds can be redeemed at participating banks, who will in turn use these bonds for collateral at the European Central Bank.

So, the restructuring has begun, and fittingly, it has begun in Greece, to the detriment of its own companies and citizens (and Greece's international medical suppliers).

Make no mistake: this is definitely a restructuring, all protestations to the contrary. Greece’s creditors receive less than they are owed and receive it at a later nominal date.

And my next question is: when will this process start with Greece’s national and international bank creditors?

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