A haircut for the bold or the bald?

Illustration by Ilias Makris

Some people will think that the haircut of 50 percent or so being proposed for holders of Greek debt is a get-out-of-jail-free card for Athens and unfair punishment for investors. They would be wrong on all counts.

The writedown, set to be finalized at the European Union leaders’ summit on Wednesday, is the result of failures by both parties. The banks and hedge funds made what they hoped would be a risk-free investment in a country that they knew was the most badly placed of all those standing on the shifting sands of the euro. The market should have factored in the structural problems that plagued both the single currency and Greece, but it didn’t. In accordance with the rules of the game, both sides will pay a price.

As the economist John Maynard Keynes told a fellow director of National Mutual in 1938: “I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself.

“Any other policy is anti-social, destructive of confidence and incompatible with the working of the economic system.”

However, some third parties — eurozone members, the International Monetary Fund and the European Central Bank — will avoid feeling financial pain. This, despite the fact they’re also responsible for political and economic miscalculations that led us to this point.

Ahead of the EU leaders’ summit on Sunday, the troika of the IMF, ECB and European Commission, delivered a jarring report that overturned previous, more hopeful predictions about Greece’s debt sustainability. The report suggested that without a haircut of 50 percent, Greece’s debt-to-GDP ratio would surpass a shocking 180 percent over the next two years and would still be at least an unhealthy 130 percent by 2030.

Even with the 50 percent haircut, Greek debt is projected to be at 120 percent of GDP in 2020 and just over 100 percent in 2030. The report is an admission that since last year, the Greek government is not the only one that got it wrong. The troika’s analysis of the situation was flawed and its forecasts, which saw the recession slowing down rather than getting deeper and Greece returning to the markets this year (it is now projected to do so in 10 years’ time), were woefully off target.

However, the money Greece owes to the IMF, the ECB and its eurozone partners is not up for renegotiation. In fact, the haircut will only apply to two-thirds of the country’s debt, and almost half of that is in Greek hands.

According to calculations by UBS, Greece’s total public debt is just under 350 billion euros. Of that, 55 billion (16 percent) lies with the ECB, 17.9 billion (5 percent) with the IMF and 47.7 billion (14 percent) has been borrowed through bilateral loans. This debt will not be written down. Instead, the haircut will apply to the remainder, which is 125.9 billion euros (36 percent) that is held by the international markets, 73.9 billion (21 percent) sitting with Greek and Cypriot banks, and 26 billion owned by other Greek institutions, mostly social security funds.

According to UBS’s calculations, the 50 percent haircut being proposed amounts to just a 22 percent reduction on the total of Greece’s outstanding debt. It is hardly the rescue that some might believe and an attempt is being made to appease private investors by issuing them with new bonds that would be governed by UK law rather than Greek legislation, which would hamper any future restructuring efforts. Despite its drawbacks, this is the best deal that the timorous Greek government and the ponderous Europeans have managed to haul onto the negotiating table. Athens will have little choice but to accept it as long as the investors will agree to a voluntary reduction.

However, it’s possible the glittering deal will turn out to be fool’s gold. A 50 percent writedown means Greek banks will have to be recapitalized and pension funds, already strapped for cash, will take a hit of some 12 billion euros. A rescue for the banks will no doubt be hatched (probably to the tune of some 22 billion euros, which the government will borrow). When added to the losses from the haircut, the deal to be agreed on Wednesday could cost Greece and its banks some 40 billion euros. The social security funds will be left in the most precarious position of all.

They are already suffering serious effects from the crisis. Each time unemployment, now above 16 percent, rises by 1 percent, the funds lose some 500 million euros in contributions. Speaking to Skai TV on Monday, economics professor and labor expert Savvas Robolis said that the funds are also missing out on about 3.5 billion euros a year in revenues because of the rush of people opting for retirement since 2009. Added to that is another 1.5 billion per year in contributions that are lost because of undeclared work.

Robolis said that the haircut would most probably lead to the Greek pension system having to be overhauled as it will not have enough money to meet retirement payments. Pensions have been slashed twice over the last two years, so the average is now about 800 euros per month.

There is an argument that like the banks, the social security funds should also suffer the impact of their poor decisions. Certainly, the fact that the country’s politicians have treated many of them as an opportunity to dish out jobs for their boys suggests that our reserves of sympathy should be as low as the funds’ own bank balances.

However, this overlooks the fact that those who will end up paying the price of the cronyism and amateurism are the pensioners. In all this financial mayhem, they are perhaps the only ones that have met their commitments and have a right to claim what they were promised. Instead, they are likely to see their retirement pay slashed even more. To paraphrase Keynes, there can be few things more “anti-social, destructive of confidence and incompatible with the working of the economic system” than toying with the fate of those who have paid their dues.

Nick Malkoutzis


One response to “A haircut for the bold or the bald?

  1. I think there are several reasons why a haircut should be out of the question at this time. Above all, I would advice Greece not to accept a haircut if one is offered. Details in the attached.


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