Facilitating a default

THE BIGGEST private Greek creditors are now in the bag. Days after the circulation of a plan drafted by French banks to roll over much of the Greek debt that they hold, German banks said that they would do much the same. No details are available, largely because they have yet to be thrashed out, but Joseph Ackermann, the boss of Deutsche Bank, and Wolfgang Schäuble, Germany's finance minister, said that they had agreed in principle that €3.2 billion ($4.6 billion) would be rolled over. 

Exactly what will be done is still a bit of a mystery to both the banks and German politicians. This is because the plan that must emerge by Sunday will, like the existing French plan, probably be a fiendish construct designed by lawyers and accountants to deliver some relief to Greece without triggering a declaration by credit-rating agencies that the country is in default. Even if the details are fuzzy, the broad parameters of it seem clear. People close to the talks say that German banks (like their French counterparts) insist that they will only agree to a deal which, in accounting terms, does not force them to write down the value of the Greek bonds they hold.

Thus the German plan is likely to follow the broad outlines of the French one, with Greece borrowing more than it needs and setting some aside by buying safe collateral that could be used to repay banks part of their money if the country defaults. The interest rate that Greece has to pay will probably also be similar to the 5.5-8% proposed under the French plan, although in cash terms Greece would be paying a higher rate for the duration of the rollover because it would also be paying interest on money set aside as collateral.

If the market reaction to the French plan is anything to go by, this would likely be viewed as a good deal for banks. The prices of Greek bonds eligible for the rollover rose on June 30th. The now trade at about 70% of their face value.

The open question, however, is whether these new rollover arrangements will make it easier for Greece to default and thus, perhaps, more likely that it does. On the one hand, the structures buy some time for Greece by reducing the amount of official support it has to get from the IMF and Europe. In this the rollover would seem to reduce the risks of an immediate default.

Yet the rollovers also carry a high price, in increasing the cash costs of Greece servicing its debt (compared with bail-out funds from Europe and the IMF) in the first years of the bail-out. In this, the deal would seem to provide an incentive for Greece to default sooner rather than later. The rollovers may pave the way towards a default in a second way, by making one more palatable for the banks. This is because they clarify how losses would be allocated to the banks: under the worst assumptions, they would lose a bit less than 50% of the face value of the Greek bonds they hold and that mature before 2014, with that loss declining over time. Putting a floor under losses in this way might make a Greek default a bit less messy for the banking industry, but it could make it more complicated for everyone else. If losses by the banks are capped, all the other creditors might have to bear a bigger share of the burden of making Greece's debt sustainable.

Read on: Banks would do rather well out of the proposed rollover