What are Greek bonds worth?

The benchmark GGB 6¼% of 2020 is selling at 51.735. The average closing price over the 12/31/10-6/15/11 period has been 64.2. At current prices, the market is saying that Greece can’t service a debt that reaches 160% of GDP and that the country needs to cut such debt almost in half. I agree. But the market also says that the inevitable restructuring will wipe 48% of the public debts outstanding. I disagree.
 

With over €300 billion of public assets potentially available for sale (according to Mr. Juergen Stark of the ECB board), it seems to me extremely difficult that Greece could convince private creditors and fellow EU members that half of its €320 billion in public debt be forgiven.

Nor should it. If it did, it and the rest of the EU would lose market confidence for a long time, and the weaker EU member countries would suffer serious financial dislocation. As it is evident from the current riots and the reticence of local politicians, imposing drastic austerity measures would be very difficult, and possibly unproductive.

The only viable alternative is an expanded asset sale and privatization program, one that would generate €100 billion in cash proceeds. This, coupled with a rescheduling of the remaining debt via longer maturities and below market rates (in all equivalent to a 15%-20% “haircut”), would effectively put Greece back on track.

The problem is that there would be a timing mismatch between Greek debt maturities and asset sales and privatizations. Nevertheless, this problem can be solved provided that the appropriate laws are passed, a credible time-table is agreed upon and (some) assets for sale are put into some kind of trust for the benefit of the EU members and supranational entities that would buy debt maturities and be repaid with the proceeds of privation and asset sales.
Initial popular sentiment may be against such a large asset sale. But if properly explained, it would be more palatable than more drastic austerity measures. Furthermore, popular approval could be gained by introducing a form of capitalismo popular (see earlier articles below) whereby Greek households would obtain attractive financing to participate in these privatizations.

No solution will be easy, but some are better than others. Under most reasonable scenarios, Greek public debt should trade well above current prices.

We hold no position, long or short, in Greek debt.