Financial Times


Talks between Greece and its private sector bondholders are going nowhere. Both sides may meet again tomorrow to revive the process, aimed at reducing the amount of debt held by bondholders by 50 per cent to about €100bn. In the context of the wider eurozone crisis, the talks are a sideshow. Fraught with moral hazard as it is, an agreement is important, nonetheless.

There are two problems with the initiative. One is that Greece’s economy is doing far worse than expected: finance minister Evangelos Venizelos says gross domestic product probably shrank by more than 6 per cent in 2011. Six months ago, the projection was 3.8 per cent. Greece’s financing needs are also growing. Its banks are thought to need €40bn to recapitalise because of the scale of withdrawals, rather than the €26bn pencilled in a few months ago. It is hard to agree to anything when the ground is shifting so violently under the parties’ feet.

The other problem is that the agreement that most people hope for is probably impossible to construct. The write-off is supposed to be voluntary. But its terms are too harsh, and some bondholders will be too truculent, to achieve that. And it is supposed to be for a minimum of €100bn, which means that it is not really voluntary. The aim is to cut Greece’s debt to GDP ratio to 120 per cent by 2020 from over 160 per cent today. A 50 per cent writedown is unlikely to achieve this given the macro deterioration. But an agreement cannot be too generous to Athens, or else other stricken eurozone countries, such as Portugal, might demand one, too.

A default by Greece is not really a question of if, or even when, but how. The private sector initiative is about managing an orderly default. That is why an agreement is important. Greece has to repay €14.4bn of debt on March 20. Without the private sector on board, it will not have the cash to do so. Bondholders should embrace a Greek default on the lousy terms on offer. The ugly alternative is that they may have even worse terms thrust upon them.