How to Fix Greece

It occurred to me recently that there is a very simple solution to the Greek debt & subsequent Eurozone crisis which should have been tried before forcing a controlled default and recapitalising the EU banks (as is currently being discussed by EU leaders).

It is now widely agreed that politicians in the Eurozone have been merely ‘kicking the can down the road’ and not getting ahead of the problem … which has resulted in contagion spreading and a loss of faith by the markets. The discussions in recent days are about how to leverage the EFSF (European Financial Stability Facility) to be large enough to ‘shock and awe’ the markets into submission so they stop causing problems and uncertainty. The EFSF is currently around €450billion and there is talk that they may leverage this up to ~€2trillion.

That’s a lot of zeros!

So what about this as a first step:

Greek national debt currently stands at around €340billion. The problem is that this is larger than the GDP of a country which is also still in recession.
All of Greece’s government bonds are selling massively below par value. For example, 1-year Greek debt is currently yielding >100% which means it is available to buy at 1/20th of face value. I.e. you can buy €1 of Greek debt for €0.05.

Why don’t the Eurozone politicians & IMF lend Greece €100billion in a 10 year loan, on the condition that it can only be used to buy its own sovereign debts back at less than 50% of par value. This would result in €100billion buying more than €200billion of Greek debt, reducing their national debt burden by a net of €100billion … saving them more money than the current suggestion of a controlled 20% default!

Markets would undoubtedly react and quickly re-price the Greek debt, but that is a good thing. It removes the pressure on EU banks to mark Greek bonds to market and face recapitalisation. Many banks that have written down their Greek debt could write it back up again. This loan could reduce Greece’s debt and serve to recapitalise the EU banks. Any money that could not be used to buy discounted bonds would not be drawn down by the Greek government.

Should markets continue to sell, that’s even better for Greece as they are reducing their national debt and re-organising it so that repayment isn’t expected until much later.

I am no awesome economist, but would this not restore confidence quickly and stop the problem from spreading (the model could be repeated to any country in serious distress). It is very common for companies to buy back their debt or shares when they deem them cheap … why can’t countries do the same thing?