"A big haircut does not mean great debt reduction"

A catalytic intervention on all that has been happening in recent days with the infamous Greek debt haircut was made by Piraeus Bank chairman Michalis Sallas.

As he states, the deal for the level of “haircut” being deliberated in Europe , ie 21%, 30% or 50%, will benefit the Greek state and the total debt very little.

He supports that even with a 50% haircut, the ultimate benefit will be 20-25 billion as per the July 21st decision, since the whole arrangement will only concern private bondholders and not the ECB, EFSF or other holders of Greek debt.

Mr. Sallas’ statement is as follows:

“Those who support a large “haircut”, ie over 21% are divided into two categories: The first are those who have nothing to lose either from the collapse of Greece or their own portfolios. In the second category are those who have not understood any of the consequences of this action and probably do not understand what it is. The sad thing is that people who should understand belong to the second category.

Based on holdings declared for voluntary July 21st PSI, if we accept that instead of a 21% “haircut” that the decision provided for, a 50% haircut is decided, then we are led to a further decline of the Greek debt by 20-25 billion, and not by 180 billion which some seem to believe. The benefit would be 20-25 billion, which for the most part Greece will have to reborrow from the IMF and European countries in order to reinforce its insurance funds, an amount of around 10 to 15 billion, from a total of a debt of 360 billion! Unfortunately, it has not been understood that the “haircut” proposed by some through PSI does not include ECB bonds of around a 60billion value, the Troika loans of up to 65 billion and other loans signed by the Greek state of around 20 billion, Greek Treasury Bills of around 15 billion, bonds due after 2020, another 40-45 billion, and other liabilities to supplies etc. of the Greek government, and all those abroad who did not even participate in the 21% “haircut” of PSI in July.

It should be understood that those who have registered for PSI in July were, at a rate of over 50%, banks, insurance companies and Greek Insurance funds. Thus, the whole story mainly concerns the Insurance and Banking system of Greece, for which the Greek government will need to reborrow in order to meet the needs created by the “haircut”.

Thus, a phenomenon will arise where the Greek government will  have to accept erasing debt owed to Greek institutions, which will in turn lead to loss of reserves or capital adequacy. This will lead the state to borrowing from international organizations yet again, with whatever this implies, in order to refund banks and cover fund losses.

The consequence of all this will be to bankrupt the country internationally, apply even more pressure to it and spread the risk of contamination to the entire European financial system, as it is supported by the ECB, while the Greek Stock Market, which has already suffered billions' worth of losses, is brought to its knees.