ATHENS (Reuters) - If Greece restructures its debt, it may choose to extend bond maturities rather than take the harsher step of cutting the amount of principal it repays. But the softer option might hurt Greek banks and state pension funds without doing enough to solve the country’s debt problem.
A growing number of Greek politicians, including some from the ruling socialist party, is urging the government to bite the bullet and go for a “soft restructuring” as markets remain sceptical about fiscal and economic reforms.
Although the government strongly denies any restructuring is on the cards, many bankers and analysts believe Greece may have to choose one or more of several options sometime in the next couple of years: extending maturities, lowering interest rates, and cutting capital.
Of those, extending maturities seems the most likely; in a Reuters poll of 55 analysts this week, 38 said Greece would most likely use that method. Nineteen picked cutting the principal, known as a “haircut.”
But merely extending maturities would be “a trick playing for time,” said Jens-Oliver Niklasch, bond strategist at LBBW, who believes Greece will probably have to extend maturities and also make a haircut of 30-50 percent. “It is not enough.”
A simple maturity extension would have negative effects on Greek banks and state pension funds because they are sitting on big piles of Greek government bonds.
Greek banks are estimated to hold close to 20 percent of the country’s estimated 327 billion euro sovereign debt, or nearly 60 billion euros. National Bank has the biggest share at 12.8 billion euros; the second biggest bank, EFG Eurobank, has about 7.4 billion euros, according to sources at the banks.
Greek social security funds hold slightly over 8 billion euros, according to the Finance Ministry. But their relative exposure is huge, as their liquid assets total 11.68 billion euros. IKA, the biggest fund, has almost two thirds of its liquid assets in Greek bonds and Treasury bills.
If they are unable to pay health and pension benefits, the state will be forced to help, which would further hurt its fiscal position as the government defies public opposition to impose waves of tough austerity measures.
Some analysts therefore think the Greek politicians who are urging debt rescheduling may not fully understand what it would entail.
“Maturity extension could be costly. Banks could be forced to make mark-to-market adjustments on their total Greek bond positions, not just the affected bonds,” Deutsche Bank said in a recent report.
For example, a five-year Greek government bond with a coupon of 6.5 percent currently yields about 19 percent in the secondary market with its price at 61.8. If its maturity were extended to 10 years, its price could be expected to fall to 45.8, based on a drop of 26 percent in net present value, according to a calculation by an analyst at a Greek bank.
The impact of this would be limited by the fact that banks and pension funds hold the bulk of their bonds to maturity in their banking books, meaning — depending on their accounting approaches — that they would not have to take trading losses on those bonds.
“If repayment is extended on the bonds without an increase in the coupon, there will be a mark-to-market impact for bonds held in banks’ trading books, but no direct impact on those held to maturity in their banking books,” said Natixis Securities analyst Antoine Burgard.
But a pure extension of maturities would not actually cut Greece’s debt burden, but simply shift part of it further into the future. So while it would help Greece’s liquidity in the near term, it would not address its underlying problem.
For that reason Greece might also have to cut the interest paid on some of its outstanding debt, an option expected by 24 of the analysts in the Reuters poll. This would start to become painful for the banks and pension funds by reducing the income they received.
And if Greece resorted to a haircut, a debt restructuring could have a very substantial impact on banks’ capital adequacy levels and on pension funds. For banks, a 30 percent haircut might cost them over 12 billion euros, and a 50 percent haircut, more than 24 billion euros, analysts estimated.
In the harsher 50-percent haircut scenario, all Greek banks would experience a capital shortfall and would need to recapitalise. This might force them to turn to Greece’s 10 billion euro Financial Stability Fund (FSF).
Mediobanca Securities estimates that if there is a 43 percent haircut, the erosion of the core Tier 1 capital ratio of Greek banks would range from 2.07 percentage points for Alpha Bank to 7.68 percentage points for National Bank.
If one assumed banks had a core Tier 1 capital target of 9.5 percent of risk-weighted assets, this would mean Alpha Bank needed to raise additional capital of about 40 percent of its market value, now at 2.04 billion euros, Mediobanca estimated.
“A less severe assumption of a 20 percent haircut could be digested without additional capital pressure, with National Bank still enjoying a 10.3 percent Tier 1 ratio,” analyst Alex Tsirigotis said in a recent report.
For troubled social security funds, any haircut could be catastrophic. Already facing the effects of an ageing population and a shrinking of the labour market, they were given a lifeline through recent reforms but their position is hardly secure. They would be dependent on a state that lacked the resources to support them.
“Greece has lived beyond its means for some time and I think they will pay the price,” Niklasch said. “This will last a decade or even longer.”
Writing by Dina Kyriakidou; Editing by Andrew Torchia