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Monday, 15 June 2015

Greece - a debt for equity swap

Allegedly, Greece has 240 billion euro of government debt of which 160 billion euro to France and Germany (FT 1, FT 2). Basically, the current discussions involve a restructuring of the Greek economy without granting any debt relief. Latter is unacceptable to the Greeks. Debt relief for Greece, however, requires trust from its creditors which is probably remote to zero right now. A bankruptcy of a company would normally imply that a court rules that a company is insolvent and must cease its activities. Technically such a company goes into limbo until new money would flow in to pay off the creditors. A bankruptcy of a country results into a more complicated situation.

Debt relief without (future) trust is hard to negotiate – perhaps even impossible. There's another scenario: a debt for equity swap. In such a scenario the creditors become shareholders – or owners. Greece is not (yet) a company that issues shares that can be bought but technically it's conceivable. The real equity of Greece is its land – or islands. A 240 billion euro debt for equity swap would probably result into Greek islands changing nationality. It is unclear to me whether there are enough Greek islands for that purpose and if the Greek mainland could remain Greek.

A debt for equity solution would most likely still involve a third Greek bailout of 30-50 billion Euro as Greece appears to be a structural bleeder (cash out always exceeds cash in). It's hard to imagine that any new funding would not be asset-backed which implies that Greek territory (e.g., remaining islands, mainland) is pledged to its creditors. This would be the ultimate consequence for an unreliable debtor. From a geo-political and military view, a debt for equity solution would prevent Russia from further aggression and expansion around the Black Sea (see my June 6 blog).

Alternatively, Greek islands could be auctioned for sale and the proceeds could be used for Greek debt relief. Only countries may have the amounts of cash required for such bidding. A silent debt for equity swap should provide better results.

The Greek counter proposal wants it all: full debt relief, additional new (30-50 billion euro) loans and no serious restructuring of their economy. Most bankers would refuse to continue funding after having agreed to a haircut (a.k.a. write-off) on their outstanding loans. Moreover, it's unimaginable that any EU leader would survive the consequences of this Greek proposal in their next elections.
Perhaps the existing 240 billion Euro loans are already asset-backed but the refusal of creditors to even discuss debt relief makes me skeptic. The forthcoming Greek debt restructuring will become a major lessons learned. The element of political risk in country credit risk rating will need to be reviewed. Asset-backed government borrowings may become the way forward for certain countries.

The current Greek debt situation was caused by both debtor and creditors. Creditors were too eager to lend and the debtor was too eager to borrow. Either both parties underestimated country credit risk or it was a fraud / scam of amazing proportions. Or both.

The Greek situation must be resolved. Any agreement must involve debt relief and a sustainable economy that does not require eternal external funding. The only way forward would be a debt for equity swap, including additional funding, and based on a sustainable future business model.