6 Min Read
May 10 (IFR) - It is increasingly likely that Greece will become the first sovereign ever to choose to restructure debt owed to the IMF - putting in question for the first time the IMF's status as an unchallengeable preferred creditor when it comes to sovereign debt.
People involved in Greece's efforts to get its finances into sustainable shape, and to eventually return to the bond market, believe that a restructuring of debt owed by the country to the Fund is all but inevitable as part of the so-called official sector involvement (OSI) that would also see Greece restructure debt owed to fellow eurozone members and the European Financial Stability Facility.
"[Europe will not allow its debt to be restructured] unless the IMF joins and goes along with them," said one lawyer involved in debt talks in Athens. " will say that US taxpayers, as largest IMF shareholders, should not be paid out whilst the European taxpayers suffer."
"This is the tragedy of Strauss-Kahn's decision to allow Europeans only to do two-thirds of funding," the lawyer said, referring to Dominique Strauss-Kahn, the IMF's managing director at the time the Greek bailout was agreed. "That's why the preferential creditor status for the IMF is now at risk."
Lee Buchheit, the doyen of international sovereign restructuring specialists, declined to comment specifically on Greece, for which he is working as an adviser, but acknowledged that significant OSI for indebted European countries was now a matter of when, not if.
"The obvious consequence of the official sector's decision to lend bailout countries the full amount needed to repay their private creditors in full is that the debt restructuring, when it comes, must bite those official sector lenders," he said.
Following last year's exchange of 200bn Greek sovereign bonds for new discounted longer-term paper, as well as a 32bn buyback, private sector debt now accounts for just 10% of Greece's overall liabilities. These stood at 300bn at the end of last year, or 156% of Greece's GDP.
"The only thing standing between Greece and regaining market access is the debt of the official sector," said the lawyer. "After buying back private sector bonds, official sector restructuring is the only option left."
Some forms of OSI have already started across Europe. As part of its revised bailout, Greece has already extracted easier terms for its outstanding bilateral loans to its eurozone partners. This year both Ireland and Portugal have managed to revise the terms of their EFSF and other loans.
"OSI is already here. The maturities of official sector loans have been extended and interest rates substantially reduced. Even the Irish promissory note has been extended for 40 years," said Buchheit.
"There is certainly precedent for OSI," said Gabriel Sterne, chief economist at agency broker Exotix, and former senior economist at the IMF. "To my mind they already did it when they reduced the interest rates on the official sector loans in November last year. They just didn't do enough."
The IMF has thus far remained resolute that its loans to Greece's bailout cannot be revised. But with US$28bn outstanding to Greece - 16 times the country's IMF quota - that position is now viewed as unsustainable, especially if Greece wants to return to the bond markets.
"A return to genuine market access will require these countries to make themselves presentable to the market," said Buchheit. "With huge debt stocks, now owed mainly to official sector lenders, hanging over their heads, it may be difficult to make that case. The options for the debtor countries? Reduce or stretch out the official sector debts - or remain wards of the official sector for an indefinite period."
It is against this background that Greece's finance minister Yannis Stournaras told Greek television on Thursday that the country plans to return to the capital markets by the end of next year.
With Greece's 10-year yields dropping below 10% last week, having been over 30% just 12 months before, bankers in discussion with the country believe a near-term return to the markets is a reality.
"I see no reason that Greece could not return to the market next year if the macro environment holds up and they continue to deliver on the Troika programme," said Hakan Wohlin, global head of debt origination at Deutsche Bank, which advised on Greece's private sector debt restructuring last year.
Wohlin refused to comment on the possibility of OSI.
Last week IMF communications director Gerry Rice said: "We do not envision any new OSI discussions at this juncture. But our projections show that further debt relief will be needed for Europe to meet its commitment to reduce Greek debt significantly to a sustainable level.
"Greece's European partners have said they expect to review the country's case by the end of this year. They have not specified how the debt relief would be provided, if needed, but there are various options, including more generous terms on loans or outright transfers."
The Greek finance ministry did not immediately respond to calls seeking comment.