greece austerity demonstration protest IMF

"Greece is not for sale" by Christina Kekka

European finance ministers agreed to extend more money to Greece yesterday, after the Greeks fulfilled their end of the bargain by passing a severe austerity and privatization package amid mass protests. The finance ministers extended the 8.7 billion euro ($12.6 billion) loan, which added to the 3.3 billion euro loan from the IMF will get Greece through borrowing and debt service for the rest of the summer. This money essentially passes through Greece on the way to European banks, who are the main creditors.

But the big lift is coming, with the other 80-90 billion euros promised in the rest of the package. This probably won’t be decided until early fall. But several banks have agreed to take writedowns of Greek debt in order to stave off a wider crisis.

In a statement, the board of the Institute of International Finance, representing more than 400 of the world’s largest banks, announced its intention to consider buy-backs of Greek government bonds “to lay the basis for a more sustainable debt position”.

Since market prices of Greek debt are far below their original sale prices, any buy-backs by the Greek authorities, European governments or other official purchasers that were at prices close to current market prices could provide significant debt relief to Greece.

The consequence would be for banks and insurance companies to take losses on the debt sold to new official creditors, reducing the total stock of debt owed by Greece and enhancing the sustainability of the country’s public finances.

Europe is actually looking for more help from the banks, a restructuring that would allow a rollover of Greek debt under more favorable terms. Not every major player has yet signed on to this, though French and German banks have been seen as receptive. The trick will be to effect this rollover without it being called a default event.

David Dayen

David Dayen