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Greek debt

April 2, 2012

Following the first economic haircut, Greece is expecting improvements in its debt situation. However, some investors remain skeptical.

ARCHIV - Griechische Fußballfans feiern im vollbesetzten alten Athener Panathinaikon-Stadion ihre Nationalmannschaft als Europameister (Archivfoto vom 05.07.2004, aufgenommen mit Zoom-Effekt). Die Beteiligung der privaten Gläubiger am Schuldenschnitt in Griechenland hat die wichtige 75-Prozent-Marke deutlich überschritten. Foto: Paris Papaioannou/ANA EPA +++(c) dpa - Bildfunk+++
Symbolbild Schuldenschnitt GriechenlandImage: picture-alliance/dpa

In early March, after months of talks, Greek authorities negotiated a debt swap with private investors. One of the participants in the discussion was Hans Humes, president of Greylock Capital Management, an investment firm that specializes in emerging markets and distressed assets. He described the mood as similar to "a family falling-out at the dinner table," although "a bit more formal."

A lot was at stake for Humes, as 10 percent of Greylock's investments had been poured into Greek bonds. This is yet another in a series of debt restructuring programs that the firm has contributed to in the last 20 years - it also provided its assistance in Mexico, Argentina, Ecuador, Yugoslavia, Russia and the Philippines.

The problems in those countries were similar to those currently affecting Greece.

"When a country can no longer carry its debts and when it can't find a way to get hold of new money, then the investors have no choice but to look for a solution," said Humes, pointing out that, from an investor's perspective, breaking negotiations with Greece and demanding a full payback of the debt would be "completely irrational."

"The alternative is the collapse of their economy, and then they won't be able to pay us any money for 20 years."

Ensuing losses

The solution reached in Athens means significant losses for Greylock. For Humes, it was a nightmare scenario that came true.

Meanwhile, California-based PIMCO, the world's biggest bond fund manager, managed to get out of Greek bonds in time, withdrawing at the start of 2010. Andrew Bosomworth, one of its senior portfolio managers, does not believe that the current bond swap is the ultimate solution to the country's problems.

Cleaning paint off the bank of Greece
Greece may not be able to pay its debts back for many yearsImage: dapd

"We expect to see another debt restructuring in Greece," Bosomworth told DW. "This is why we are keeping away from Greek government bonds."

However, it may be years before another debt restructuring takes place. If it happens, Bosomworth believes it would mostly affect government investors, who now carry nearly three-quarters of Greece's debt on their shoulders. For this reason, he says, another restructuring would probably have less effect on financial markets than previously thought.

Far-reaching consequences

During Greece's first bond swap, only private investors such as banks and insurance companies have had to take on the debt. But the second round would affect institutions such as the International Monetary Fund, the European Central Bank and eurozone countries, and ultimately tax payers. It would be a likely topic in national election campaigns.

This is already the case in countries with economic troubles such as Greece, Portugal, Italy and Spain. Humes sees this as a threat to stability in the eurozone.

"If youth unemployment reaches 10, 15 or 25 percent, these people will demand change," said Humes. "And then irrational political decisions can be made."

Greece exiting the eurozone is an example of the decisions he would consider irrational. He believes that this would bring on a more profound financial crisis than in other countries that had to restructure their debt in the past, such as Argentina.

However, Bosomworth believes that this decision is very likely. He also points out that Greece's eurozone withdrawal would also have a negative impact on other countries.

"There's a danger that we'll see a bank run in Portugal, Ireland or Spain," said Bosomworth.

Prominent Canadian economist William White has similar concerns.

"More and more people in Europe are saying, 'If we didn't have the euro, we wouldn't have these problems,'" said White. "But it is wrong to conclude from this that leaving the eurozone now will make the problems go away."

Author: Andreas Becker / ew
Editor: Joanna Impey

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