U.S. Investors Brace for a Third Bailout in Greece
The last-minute deal will see Greek debt holders swap their current bonds for new Greek bonds with maturities between 11 and 30 years. In exchange for taking a steep hit to the face value of the bond along with lower coupons, investors will also get European Financial Stability Facility notes. In total, investors would be agreeing to a 53.5% haircut and Greece's debt would be reduced by about $145 billion. It would also put off any disorderly default by Greece.
But by his count, Stone says Greece has now defaulted twice, even if the credit default swaps haven't been triggered. "If I have to take a 53% haircut on what I own, by my definition that's a default in the real world," Stone says. "When you think about it, you have to imagine that investors will hold it against them going forward."
Stone warned investors in January not to get too caught up in the crisis. In his 2012 outlook, Stone noted that Greece has spent 50.6% of the years from independence in 1800 through 2008 in default or restructuring. The U.S. never was in default during that time. He also notes that sovereigns tend to re-lever quickly following a sovereign default episode. That may explain why Greece, having been in default or restructuring for more than half of the years since its independence, finds itself in trouble yet again.
"The probability remains high that this isn't the end of it," Stone adds. "With debt-to-GDP ratios, you do have to be worried that the IMF definition of sustainable is not the market's definition of sustainable. But I do think eventually that investors will move on."
That seems hard to believe. The Greek debt headlines have been inescapable for investors to the point of exhaustion. Unfortunately, it seems the second bailout is only the beginning. CNBC on-air anchor Carl Quintanilla joked in a tweet that Greece's second bailout is "like a Hollywood sequel: bigger budget, confusing plot, leaves door open to trilogy."
"This is a George Lucas production," quips Paul Nolte, managing director with Chicago-based Dearborn Partners, referencing the filmmaker who brought six Star Wars and four Indiana Jones epics to the silver screen. "The debt hasn't gone away. It's still there. So perhaps a better analogy is that it's like shuffling cards and the joker keeps showing up."
These jokes may not be far off the mark. Both Reuters and The Financial Times separately reported Tuesday on a confidential analysis conducted by the International Monetary Fund, the European Central Bank and the European Commission that shows Greece will probably need additional relief in order to reach that debt-to-GDP ratio of 120% by 2020. Without structural reforms and any meaningful changes, that number could jump to 160% by 2020.