Tags: Roubini | Greece | Private | Creditors

Roubini: Greece's Private Creditors Will Be OK

Friday, 09 March 2012 08:15 AM

Economist Nouriel Roubini says that while Greece's public creditors may be in serious trouble, the country's private creditors will be just fine.

"The reality is that private creditors got a very sweet deal while most actual and future losses have been transferred to the official creditors," Roubini writes in the Financial Times.

“Taxpayers of Greece’s official creditors, not private bondholders, will end up paying for most of the losses deriving from Greece’s past, current and future insolvency.”

However, Roubini says, even after private sector involvement, "Greece’s public debt will be unsustainable at close to 140 percent of gross domestic product: at best, it will fall to 120 percent by 2020 and could rise as high as 160 percent of GDP."

The reason, Roubini says, is that a “haircut” of 110 billion euros ($145 billion) on privately held bonds is matched by an increase of 130 billion euros in the debt Greece owes to official creditors.

“A significant part of this increase in Greece’s official debt goes to bail out private creditors: 30 billion euros for upfront cash sweeteners on the new bonds that effectively guarantee much of their face value,” Roubini says. “Any future further haircuts to make Greek debt sustainable will therefore fall disproportionately on the growing claims of the official sector.”

Moreover, the new bonds will also be subject to English law, where the old bonds fell under Greek jurisdiction. So if Greece were to leave the eurozone, it could no longer pass legislation to convert euro-denominated debt into new drachma debt.

“This is an amazing sweetener for creditors,” Roubini says.

But while Greece may have restructured its debts with private bondholders but the country will default sooner or later, as the restructuring doesn't address fundamental economic problems in the country, says Scott Wren, senior equity strategist at Wells Fargo Advisors.

"Even if we band aid this Greek situation right now, they’re going to default down the road or write down 100 percent of the debt," Wren told CNBC.

The Chicago Times reports that the euro dipped and European stocks made small gains after Greece won strong acceptance for a bond swap deal that eases its path to second bailout.

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