The always excellent Barry Eichengreen of UC Berkeley has some good thoughts on a potential outline for a Greek debt restructuring. As I’ve said before, this can be done in such a manner that it doesn’t create excess turmoil in the markets. Eichengreen explains:
“First, the new bonds could be structured so that haircuts incurred by the banks count as tax losses, reducing the hit to their profits. This would amount to using governments’ fiscal resources to facilitate a Greek restructuring. But, if taxpayer money is at risk anyway, as it is today, why not use it creatively?
Second, the ECB could offer to provide special treatment – “secured financing” – on the new debt to make it attractive to investors.
Third, regulation could be used to reconcile Greece’s need to restructure now with the banks’ wish to wait until their balance sheets are stronger. Under the Brady Plan, an accounting rule called FASB 15 allowed restructured loans to continue to be booked at their original face value, so long as the sum of interest and principal payments on the restructured instrument at least equaled that on the original credit. New bonds, on which interest was back-loaded, could be given the same accounting value as old ones on which interest was paid earlier.
This special accounting treatment could then be phased out over time, requiring banks to acknowledge their losses, but only once they were able to do so.
Fourth, the new instruments could be tailored to give both banks and official lenders a stake in the country’s success. Under the Brady Plan, a country’s payments were indexed to its export prices or terms of trade. The equivalent for Greece would be to index payments to its rate of GDP growth, thereby automatically adjusting Greece’s debt burden to its payment capacity.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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