|The vaunted 21 percent haircut is nothing more than a myth. Image Source: The Telegraph|
The latter has been mistakenly seen by some analysts as a restructuring of the Greek debt, since creditors are thought to receive a "haircut". According to the Institute of International Finance the private sector (the bankers) will have a reduction in the net present value of their bonds of 21%. Note that this number has nothing to do with the amount of the Greek debt. It is a mere discount on the face value of the bonds.
In a paper by Peter Allen, Barry Eichengreen and Gary Evans, that was published on Bloomberg on August 5, we get the following with respect to this:
This number has nothing to do with the amount by which Greece’s debt will be reduced. What some analysts have mistakenly been calling a “haircut” is simply the discount relative to par value at which the new bond options will trade in the secondary market, assuming a Greek sovereign yield of 9 percent.The vaunted 21% haircut is nothing more than a myth that has been cultivated with the sole purpose of misleading reluctant national governments in the European core, to accept yet another bailout to Greece, from their taxpayers money. All this talk about the voluntary participation of the private sector is a way of sugaring the pill to taxpayers in the surplus countries.
...Even after taking into account that Greece pays back only 80 percent of the original principal in year 30, the present value of debt falls only 1.78 percent under this option. This is a far cry from the 20 percent discount applauded by many analysts. And, to entice bondholder participation, Greece must borrow an additional 26.10 percent of the original face value to purchase the zero-coupon bonds’ principal collateral for the discount security.
...The deal helps to extend Greece’s bond maturities. Yet, once it is concluded, the present value of the debt tendered falls by only 6.78 percent, or 9.15 billion euros, even if one accepts the surely over-optimistic assumption that 90 percent of bondholders will participate. This is an expensive proposition given that Greece must purchase 42 billion euros of zero-coupon bonds to collateralize the principal payments.
This discussion is only a means of concealing the fact that EU leaders have failed to devise an effective Euro-wide strategy to deal with the systemic crisis of the Euro. It is a way of concealing the toxicity of the EFSF, which is the source of contagion.
It is cultivated to conceal the false interpretation EU officials have about the crisis, which they mistakenly call a "debt crisis", when in fact it is a systemic, triple crisis (a) debt crisis, (b) quasi-bankrupt banking sector crisis, (c) under-investment crisis in the European periphery (see my article The crisis in the EU spirals because it is systemic).
The myth of the 21% haircut is used to mislead people into thinking that the new deal which was decided on the July 21 summit, is an audacious plan to save the euro, when in truth it massively fails to address the fundamentals of the crisis.
The EU needs real solutions to its problems. The cultivation of myths in an attempt to create positive expectations will have a negligible impact in the efforts to save the euro and contain the crisis.
For the time being, no real solutions have been delivered. European leaders are kicking the can down the road. The point is that with every kick, the can becomes bigger and heavier since time is against the euro. This is clearly seen in how contagion has not been contained so far. The more a Euro-wide solution is delayed, the greater the risk for the crisis to seriously contaminate the European core.
Article source: http://www.protesilaos.com/2011/08/evaluation-of-myth-of-21-haircut-on.html
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