Holders of Greek debt face 60% haircut

Private holders of Greek debt may need to accept losses of up to 60 per cent on their investments if Greece's debt mountain is to be made more sustainable in the long-term, a downbeat analysis by the EU and IMF showed.

Euro zone finance ministers threw Greece a lifeline yesterday by agreeing to approve an €8 billion loan tranche that Athens needs next month to pay its bills.

But the European Commission, European Central Bank and International Monetary Fund issued a gloomy report on Greece's ability to pay its debts.

Among three scenarios it examined, the only one that would reduce Greece's debt pile to 110 per cent of GDP - a level still regarded as high - was one in which private bond holders agreed to a 60 per cent haircut.


"To reduce debt below 110 per cent of GDP by 2020 would require a face value reduction of at least 60 per cent and/or more concessional official sector financing terms," the debt sustainability report, obtained by Reuters, showed.


A footnote explained that the ECB disagreed with including the scenarios in the report, concerned that private sector lenders would refuse to agree to such a steep writedown voluntarily, effectively leading to a fullscale Greek default.

The report also said Greece's debt pile could peak at 186 per cent of GDP, from around 160 per cent currently.

The euro zone finance ministers said the €8 billion euro tranche, the sixth instalment of €110 billion of EU-IMF loans agreed last year, would be paid in the first half of November, pending the IMF's sign-off. That should allow Greece to avoid defaulting on its debt this year.

Meeting ahead of a summit of EU leaders tomorrow, finance ministers also indicated that deep divisions between France and Germany over how best to scale up the euro zone's bailout facility to give it more firepower may have been overcome.

France believes the most efficient leverage method would be to turn the European Financial Stability Facility (EFSF) into a bank, allowing it to access ECB liquidity. Germany and others opposed this approach.

If France does ultimately drop its insistence on the EFSF being turned into a bank, then the most likely method for scaling up the EFSF is expected to be some form of insurance programme aimed at restoring confidence in euro zone debt.