Cyprus should prepare for a Greek restructuring plan

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By Shavasb Bohdjalian

Greece was in the news for all the wrong reasons last week and over the weekend amid intense speculation that the country is near or close to asking for a restructuring, a haircut, a default, or it somehow will manage to carry on the present course of taking more loans to pay off older debt.
Greek Finance Minister George Papaconstantinou adamantly denied press reports that Athens was considering a debt restructuring. German Finance Minister Wolfgang Schaeuble said his remark last week that "additional steps" might be needed on Greek debt were "somewhat erroneously" interpreted. The IMF said authorities were still working within the confines of the current IMF program.
EFSF Chief Regling speaking says he sees no reason for a quick restructuring of Greek Debt. The possible need for restructuring will depend on how they execute reforms and on the performance of the global economy but there is no 'Plan B' regarding possible haircuts on their debt. He ruled out EFSF participation in any debt restructuring and adds that the fund is not allowed to buy sovereign bonds on the secondary markets. Reuters quoted him as saying that the markets are convinced that Greece will not be able to pay back its debt at some point in the future but he states that markets are not always correct. He notes that such contagion risks are much lower now than a year ago while he does not expect the bank stress test results will lead to countries asking for more borrowing/aid.
Greek PM Papandreou meanwhile disappointed markets when he said that Greece will detail new measures after Easter, following a meeting with cabinet officials. The plan, which was expected to be presented last Friday, includes some EUR23 bln of further austerity measures that aim to slash Greece's deficit to below 1% of gross domestic product by the end of 2015.
There is no question that Greece will ask for a rescheduling/restructuring. The unknown is when and by how much and who will take the loss. As we come to understand, the EUR 110 bln loans that Greece is receiving from ECB/EE/IMF is being used to pay off the maturing debt of foreign banks, mostly French and German. I guess, once a big chunk of the debt owed to the foreign banks is settled, then the restructuring plan will go into operation. Personally I don’t trust Papandreou or his Finance Minister Papaconstantinou, who keep making promises but never keep them.
Greece owes EUR 350 bln and it cannot service this debt or pay it off. No matter in which way you play with the numbers, they don’t match. And numbers don’t lie, but politicians do. The restructuring issue is of utmost importance for Cyprus since the two largest Cypriot banks have purchased EUR 5 bln in Greek government bonds and all the banks may be exposed to up to EUR 30 bln in loans made in Greece.
If the restructuring happens before the Greek government bonds mature within 2 years, then the impact will be big since the Cypriot banks will take an immediate hit as the value of their bonds adjusts accordingly. If it’s after 2 years, then there is no impact at least on their bond holdings, but all the Cypriot banks will still be exposed since there will be massive losses to sustain on their loan books. The fact that so many officials from Greece, other EU nations, the IMF and others are talking about a restructuring means the plan is very close to being put into operation, which is why the fears expressed by rating agencies when they downgraded Cyprus and Cypriot banks appear to be justified. For this reason, I believe the Cyprus government should start working on the preparation of various contingency plans on how it will react to different scenarios and not wait for the actual event.