French Greek rollover: The French banks’ plan for rolling over Greek debt is an almighty fudge. It’s not entirely clear who the banks are trying to hoodwink with their elaborate scheme: accountants, rating agencies, taxpayers or all of these. But Europe would be better off with a simpler scheme that didn’t involve smoke and mirrors.
The basic proposal involves Greece’s private-sector creditors (not just French banks but other banks and non-banks) reinvesting 70 per cent of the proceeds of bonds that mature before mid-2014 in yet more Greek bonds. Since these would be 30-year bonds, Athens would face less financing pressure. About euro 60 billion of bonds owned by private-sector creditors are due to be repaid in the next three years. The French banks assume 80 per cent would play ball, meaning there would be nearly 34 billion of new money for the Greeks.
So far, so simple. The twist is that 30 per cent of this cash doesn’t really go back to Athens at all. It is parked in a special purpose vehicle (SPV), which then buys bonds issued by a AAA-rated entity - say the German government. So, the Greeks only actually get euro 24 billion.
What's the purpose of sticking the other euro 10 billion in an SPV? A clue is given by the fact it will buy zero-coupon bonds. Buying a bond that doesn’t pay interest for 30 years might not seem a terribly attractive investment. But it does mean that whoever issues the bonds can afford to pay back more than 10 billion in 2041. In fact, the French banks assume the issuer could promise to repay the whole 34 billion.
One goal of this structure seems to be to persuade accountants that banks don’t have to write down their exposure to Greece because they are going to get all their money back anyway. Another goal might be to persuade the rating agencies, perhaps with similar arguments, that they don’t need to conclude that Greece has defaulted. Yet another could be to fool taxpayers into thinking that private-sector creditors were contributing more to Greece’s bailout than they really are. One can see how the banks would stress the 34 billion figure rather than the 24 billion one.
Whether this cleverness succeeds in pulling wool over people’s eyes remains to be seen. What is clear is that it’s not transparent. A more upfront way of achieving the same economic impact would be to ask Greece's private-sector creditors to roll over half their maturing debt into new bonds and forget about the SPV. If 80 per cent of creditors participated, Athens would still get euro 24 billion.
Such transparency would, of course, mean that banks would have to take provisions. But the sooner they confront reality, the better. Equally, the European Central Bank (ECB) would have to eat its words about how it doesn’t want to take as collateral the debt of any government that has defaulted (as defined by the ratings agencies). But it's about time the ECB stopped putting the ratings agencies on a pedestal as if they were gods. Politicians and central bankers should not be conniving in a fudge like this.
