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."