The numbers on Greece’s sovereign debt are confusing. The total amount of Greece’s sovereign debt is generally reported between 330-350 billion EUR. That sovereign debt is held by resident Greek institutions and by institutions residing outside Greece.
The Bank of Greece (and as the country’s Central Bank it should be the authority on this) reported per June 30, 2011 the following numbers: 179 billion EUR of the sovereign debt was owed to foreigners and 77 billion EUR of the sovereign debt was held by the Greek banking sector. That adds up to 256 billion EUR. Who holds the difference of 80-100 billion EUR of the total sovereign debt of 330-350 billion EUR? Could it be that Greek citizens hold that much in their private portfolios?
A haircut would apply to all sovereign debt, regardless whether it is held by Greek residents or foreign ones. Assuming a 50% haircut, non-Greek institutions would in sum have to absorb 90 billion EUR (50% of 179 billion EUR). Greeks banks would have to absorb 39 billion EUR. And the non-identified holders of the rest of sovereign debt (Greek citizens?) would have to absorb 40-50 billion EUR.
The aggregated capital & reserves of Greek banks was 47 billion EUR at June 30, 2011. Over 80% of that would be wiped out in case of a 50% haircut. Greece has no means whatsoever to replenish that bank capital on her own. Consequently, the EFSF would have to be prepared to transfer roughly 50 billion EUR as new capital to the Greek banking sector. With that, the EFSF would become the owner of more than 80% of the Greek banking sector. Does that make sense to anyone?
The aggregated domestic deposits in Greek banks are 193 billion EUR. Why can those depositors not be “motivated” to become the new majority owners of Greek banks? They would swap, say, 47 billion EUR from deposits into bank shares and become true stake holders of Greece. The banks should represent reasonably good value once their sovereign assets have been written down to 50% of their nominal.
Finally, the entire idea of a haircut is wrong. One simply does not forgive a country part of its sovereign debt after only 3 years of crisis. And a EU-member should not be forgiven sovereign debt ever!
If Greece needs to cut her debt service in half, then half of her debt should be rescheduled out to 30 years (or even more) with capitalization of interest. That way, no debt service burden runs through the budget. And the other half should be rescheduled for shorter terms with annual interest to be calculated in an amount which gives Greece breathing space (but not too much breathing space lest government waste does not return).