Nations often owe creditors more after debt restructurings – not less – as limping economies, weakened banks and more take their toll, Moody's Investors Service said on Tuesday, suggesting that debt-laden Greece could be in for more pain ahead.
"We basically found that Greece's experience is not unique," said Elena Duggar, an analyst with the credit policy group at Moody's Investors Service.
"In about half of sovereign-debt exchanges, debt levels actually rise after the exchange, compared to what they were in the year before. In another 20 percent, they fall only marginally," she added.
That happens for several reasons. For one thing, those debt deals often extend maturities or reduce coupon payments, but don't necessarily include a haircut on principal, Moody's said in a report on sovereign defaults from 1997 to 2012.
When a lender is forced to take a haircut on an investment, it is essentially accepting less than the face value of the asset held in its portfolio.
For another, the very pressures that led to a debt restructuring in the first place often remain, including shrinking economies and banks that might need propping up from a sovereign, the study added.
And finally, in many cases, weaker domestic currencies mean an increase in the value of foreign-currency debt relative to the domestic economy, the report said.
Sovereign bond restructurings might help liquidity, but "often fail to provide solvency relief," Moody's said.
Restructuring does help, Duggar emphasized. But "it doesn't obviate the need for continued fiscal adjustment and hopefully a return to growth."
Greece's overall debt will hit 179% of GDP this year, higher than the 171% of GDP in 2011, before rising further in 2013, the report said.
Despite a bond-exchange deal earlier this year, Greece is still suffering from economic contraction. Its debt-to-GDP ratio is expected to rise to 190% next year before consensus forecasts from international lenders show it dropping back to around 144 percent of GDP in 2020.
Greeks exhausted by waves of budget cuts have protested in the streets – sometimes violently – as the country remains mired in its fifth year of economic contraction.
"It's a lot of pain" by countries in default, Duggar said. "Whenever growth is also impaired, it takes even longer."
Greece's economic output will have dropped by a quarter since 2008 in a vicious spiral of austerity and recession.
"It's a long road," Duggar added.
